Summary

• Kim Loong Resources Bhd’s (KLR) 3QFY22 net profit expanded 42.5% YoY to RM41.1m, boosted by the higher average selling prices of CPO and FFB at RM4,630/MT and RM814/MT respectively during the quarter vs. RM2,336/MT and RM419/MT respectively recorded in 3QFY21. Revenue for the quarter improved 76.9% YoY to RM492.8m. A special dividend of 4.0 sen per share, payable on 17th February 2022 was declared.

• For 9MFY22, cumulative net profit rose 24.4% YoY to RM105.5m. The reported earnings were deemed within expectations, accounting to 79.7% of our full year net profit forecast of RM132.5m and 63.2% of consensus forecast of RM167.0m. We believe the seasonally slower production over the years in the final quarter of the financial year to materialise in 4QFY22.

• As of 3QFY22, KLR total planted area stood at 15,929-ha. During the quarter, KLR continues to maintain a healthy tree profile (Immature: 17%, Young Mature: 9%, Prime Mature: 36%, Old Mature: 15% and Pre-replanting: 23%). This implies that more than 50% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 3QFY22, KLR’s FFB production rose 1.9% YoY to 70,332 tonnes, while CPO production climbed 18.6% YoY to 89,541 tonnes. During the quarter, CPO extraction rate stood at 21.4%; continues to outperform Malaysia’s average CPO extraction rate of 20.4% over the same period highlighting the group’s production efficiency.

• Meanwhile, we note that KLR has already taken physical possession of approximately 1,100-ha of palm oil plantation land at Sandakan, Sabah (1,040-ha are planted with mature oil palms) since February 2021. The move will generate close to 30,000 of FFB per annum for FY23f.

• We foresee that CPO prices to remain firm above RM4,000/MT throughout 1H22, supported by the sustainable demand amid the gradual economic recovery, La Nina phenomenon till early 2022 and production constraints (mainly due to labour shortage). YTD, CPO futures price was traded at average RM4,142/MT.

Valuation & Recommendation

• With the reported earnings coming within expectations, we made no changes to our earnings forecast. We reiterate our BUY recommendation on KLR, but with a slightly lower target price of RM1.94 (from RM1.95) after taking consideration into the recent minor dilution impact from the exercise of company warrants.

• Our target price is derived by pegging a target PER of 14.0x to its FY23f EPS of 13.8 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. The environmental, social and governance (ESG) issues in regards to deforestation and labour-related also continues to beset the overall plantation sector.

Source: Mplus Research - 29 Dec 2021