Summary

• Kim Loong Resources Bhd’s (KLR) 4QFY21 net profit soared 310.9% YoY to RM10.0m, boosted by the higher average CPO prices at RM2,360/MT during the quarter vs. RM2,007/MT recorded in 4QFY20, alongside with the higher production. Revenue for the quarter added 40.2% YoY to RM253.7m.

• For FY21, cumulative net profit jumped 131.7% YoY to RM94.9m. Revenue for the year grew 43.0% YoY to RM971.7m. The reported earnings came below our expectations, making up to 80.5% of our full year net profit forecast of RM117.9m and makes up to 85.5% of consensus forecast of RM111.0m. Meanwhile, the reported revenue was in line with our expectations, making up to 101.4% of our forecast of RM958.5m and 108.7% of consensus forecast of RM894.0m.

• KLR continues to maintain a healthy tree profile (Immature: 21%, Young Mature: 5%, Prime Mature: 32%, Old Mature: 16% and Pre-replanting: 26%), of which more than 50% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 4QFY21, KLR’s FFB production gained 6.2% YoY to 56,355 tonnes, while CPO production climbed 1.7% YoY to 56,274 tonnes. CPO extraction rate stood at 21.0% in 4QFY21 – continues to outperform Malaysia’s average CPO extraction rate of 19.6% over the same period underlying the group’s efficiency. A final dividend of 3.0 sen per share, payable on 30th August 2021 was declared.

• We see inventory level to remain stable as demonstrated in 4QFY21. While the rally in CPO prices has soften in recent months, we reckon that demand may be firm, supported by the additional consumption in the Ramadhan month. Still, the export levy revision from Indonesia may bring some competitiveness to the Malaysia crude palm oil industry landscape.

• At the same time, stockpiling activities appears to have peaked in early 2021 ahead of the re-instatement of export tax at 8.0% since January 2021. The Malaysia government has also announced that the rate will remain unchanged throughout April 2021.

Valuation & Recommendation

• With the reported earnings coming below our forecast, we revised our projected earnings lower by 19.8% and 19.1% to RM89.5m and RM91.3m for FY22f and FY23f respectively to account for the weaker-than-expected margins due to the change in tree age profile (previously more than 70% of trees were contributing to income vs. slightly above 50% at the current juncture).

• Following the earnings revision, we downgrade Kim Loong to HOLD (from BUY) with a lower target price of RM1.54 (from RM1.91). Our target price is derived by pegging a target PER of 16.0x to its revised FY22f EPS of 9.6 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 - 19 Apr 2021