Summary

• Kim Loong Resources Bhd’s (KLR) 2QFY21 net profit surged 224.4% YoY to RM33.2m, boosted by the higher average CPO prices at RM2,360/MT vs. RM2,007/MT recorded in the previous corresponding quarter alongside with the higher production. Revenue for the quarter climbed 54.2% YoY to RM238.0m.

• For 6MFY21, cumulative net profit jumped 126.7% YoY to RM56.1m. Revenue for the period improved 35.9% YoY to RM439.3m. The reported earnings exceeded our expectations, making up to 93.0% of our previous full year net profit forecast of RM60.3m and makes up to 65.2% of consensus forecast of RM86.0m. The variance was mainly due to the rally in CPO prices.

• KLR continues to maintain a healthy tree profile (Immature: 15%, Young Mature: 6%, Prime Mature: 35%, Old Mature: 29% and Pre-replanting: 15%), of which approximately 70% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 2QFY21, KLR’s FFB production added 20.6% YoY to 79,560 tonnes, while CPO production rose 54.5% YoY to 82,260 tonnes. CPO extraction rate stood at 20.8% in 2QFY21 – continues to outperform Malaysia’s average CPO extraction rate of 19.8% over the same period underlying the group’s efficiency. An interim dividend of 4.0 sen per share, payable on 18th November 2020 was declared.

• We see inventory level to remain stable as demonstrated in 2QFY21. With the recent recovery in CPO prices, Indonesia’s B40 biodiesel programme is back on track, target commencement in July 2021. Back home, the export tax exemption of crude palm oil, crude palm kernel oil and processed palm kernel oil in Malaysia in 2H20 will buoy demand by keeping price competitive at international level.

• Demand is expected to remain intact as global economic activities recovers in 2H20 and China’s 2Q20 GDP returning to expansionary mode. The aforementioned recovery may subsequently keep inventory at a healthy level. At the same time, do note that the acquisitions of oil palm estates in Sabah are expected to conclude by year end, which will boost the group’s FFB production by 10.0%.

Valuation & Recommendation

• With the reported earnings coming above our forecast, we raised our FY21f and FY22f net profit higher by 60.3% and 61.8% to RM92.5m and RM101.4m respectively, accounting for the higher CPO prices assumption at RM2,600/MT (initial assumption at RM2,300/MT). Consequently, we upgrade KLR to BUY (from Hold) with a higher target price of RM1.74 (from RM1.16).

• We rolled over our valuation metrics to FY22f by pegging a target PER of 16.0x to its revised FY22f EPS of 10.8 sen. The ascribed target PER is in line with the mid-sized planters average at around 14.5x-17.5x.

• Risks to our recommendation include fluctuations in CPO prices. The volatility of CPO prices is subject to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could also affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.

Source: Mplus Research - 29 Sept 2020