Summary

• Kim Loong Resources Bhd’s (KLR) 2QFY22 net profit grew 9.0% YoY to RM36.1m, boosted by the higher average selling prices of CPO and FFB at RM4,121/MT and RM777/MT respectively during the quarter vs. RM2,336/MT and RM419/MT respectively recorded in 2QFY21 that offset the weaker production. Revenue for the quarter expanded 68.4% YoY to RM400.8m. An interim dividend of 5.0 sen per share, payable on 18th November 2021 was declared.

• For 6MFY21, cumulative net profit gained 15.1% YoY to RM64.5m. The reported earnings came above expectations, accounting to 72.0% of our full year net profit forecast of RM89.6m and 38.6% of consensus forecast of RM167.0m. The variance is mainly due to the higher-than-expected CPO prices.

• As of 2QFY22, KLR total planted area stood at 15,902-ha. During the quarter, KLR continues to maintain a healthy tree profile (Immature: 21%, Young Mature: 4%, Prime Mature: 37%, Old Mature: 15% and Pre-replanting: 23%), of which more than 50% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 2QFY22, KLR’s FFB production fell 11.7% YoY to 70,259 tonnes, while CPO production decreased 3.1% YoY to 79,730 tonnes. During the quarter, CPO extraction rate stood at 20.7%; continues to outperform Malaysia’s average CPO extraction rate of 19.6% over the same period highlighting the group’s efficiency.

• Going forward, the acquisition of 2,722-ac of oil palm plantation land may generate up to additional 30,000MT of FFB per annum for FY22f. Meanwhile, we note that the palm oil milling and plantation operations of the are operating as usual, demonstrating strong improvement from the prior quarter.

• Although the prospects of supply outlook appear to be better in coming months, we reckon that the elevated prices may sustain. For now, we opine that CPO prices will remain above RM4,000/MT for the remainder of the year, premised to the sustainable demand, particularly from China and India. YTD, CPO futures price was traded at average RM3,915/MT.

Valuation & Recommendation

• Given the reported earnings came above our expectations, we raised our earnings forecast by 47.9% and 46.4% to RM132.5m and RM133.8m for FY22f and FY23f respectively, taking into account of the higher-than-expected CPO prices. Consequently, we upgrade our recommendation on KLR to BUY (from Hold) with a higher target price of RM1.95.

• Our target price is derived by pegging a target PER of 14.0x to its FY22f EPS of 13.9 sen. The ascribed target PER is in line with the mid-sized planters average at around 13.5x-15.5x.

• 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 2021