Summary

• Kim Loong Resources Bhd’s (KLR) 1QFY22 net profit added 23.9% YoY to RM28.4m, boosted by the higher average selling prices of CPO and FFB at RM3,991/MT and RM808/MT respectively during the quarter vs. RM2,505/MT and RM449/MT respectively recorded in 1QFY21 that offset the weaker production. Revenue for the quarter grew 55.2% YoY to RM312.5m.

• The reported earnings make up to 31.7% of our full year net profit forecast of RM89.6m and 19.2% of consensus forecast of RM148.0m. Meanwhile, the reported revenue was at 31.2% of our forecast of RM1.00bn and 28.1% of consensus forecast of RM894.0m. We deem the figures to be in line in view of the tapering in CPO prices in subsequent quarters.

• As of 1QFY22, KLR total planted area stood at 15,874-ha. During the quarter, KLR continues to maintain a healthy tree profile (Immature: 20%, Young Mature: 4%, Prime Mature: 37%, Old Mature: 15% and Pre-replanting: 24%), of which more than 50% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 1QFY22, KLR’s FFB production fell 20.6% YoY to 56,920 tonnes, while CPO production fell 4.0% YoY to 63,777 tonnes. CPO extraction rate stood at 20.9% in 4QFY21 – continues to outperform Malaysia’s average CPO extraction rate of 19.6% over the same period underlying the group’s efficiency.

• Going forward, the acquisition of 2,722-ac of oil palm plantation land that may generate up to additional 30,000MT of FFB per annum is expected to be completed in 3Q21. We also note that that the palm oil milling and plantation operations of the are operating as usual during as KLR principal activities are classified as essential services during the implementation of Movement Control Order (MCO).

• While CPO prices has tapered from the recent peak, we expect the prices to remain alleviated, hovering above RM3,000/MT amid the sustainable demand, particularly from China and India. At the same time, the tightening supply of soybean oil in US as well as weaker local CPO production will sustain current prices.

Valuation & Recommendation

• With the reported earnings deemed to be within our expectations, we made no changes to our earnings forecast and we maintained our HOLD recommendation on KLR with an unchanged target price of RM1.54. Our target price is derived by pegging a target PER of 16.0x to its 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 Jul 2021