Summary

• Kim Loong Resources Bhd’s (KIMLOONG) 2QFY23 net profit gained 37.4% YoY to RM49.7m, mainly driven by the higher average prices of CPO and FFB. Revenue for the quarter climbed 40.8% YoY to RM564.4m. A single tier interim dividend of 5.0 sen per share, payable on 15th November 2022 was declared.

• For 1HFY23, cumulative net profit grew 37.8% YoY to RM88.9m. The reported earnings accounted to 54.3% of our full year net profit forecast of RM163.8m and 51.4% of consensus forecast of RM173.0m. We expect softer quarters ahead as the normalisation of CPO prices have accelerated in recent months and there were no signs of recovery as yet.

• As of 2QFY23, KIMLOONG total planted area stood at 15,939-ha (unchanged from 1QFY23). During the quarter, KIMLOONG continues to maintain a healthy tree profile (Immature: 17%, Young Mature: 8%, Prime Mature: 29%, Old Mature: 19% and Pre replanting: 27%). We gather that no re-planting activities took place during the quarter as KIMLOONG aims to leverage onto the elevated CPO prices.

• In 2QFY23, KIMLOONG’s FFB production fell 9.9% YoY to 63,330 tonnes, but CPO production climbed 5.5% YoY to 84,114 tonnes. Meanwhile, CPO extraction rate stood at 20.8%; continues to outperform Malaysia’s average CPO extraction rate of 19.8% over the same period highlighting the group’s production efficiency.

• We made no changes to our FFB production assumption of 280,000MT (1HFY23 numbers makes up to 44.4% of our assumption) as we enter into the seasonally high production cycle months. Optimal productivity, however, will be challenging amid the acute labour shortages as only 12.0% of the registered 400,000 foreign workers for all economic sectors have entered into Malaysia since January 2022.

• In view of the slowdown in demand, we expect CPO prices to remain below RM4,000/MT for the remainder of the year. The rising inventory level that climbed to 2.1m tonnes in August 2022; highest in two years and the change in Indonesia’s policy to boost their CPO export may continue to pile pressure on the recent depressed CPO prices.

Valuation & Recommendation

• Although the reported earnings came within expectations, we trimmed our earnings forecast by 7.2% and 12.9% to RM152.0m and RM108.8m for FY23f and FY24f after adjusting for weaker CPO price assumption to average at RM3,500/MT for FY23f (RM4,500/MT) and FY24f (RM3,500/MT).

• We maintained BUY on KIMLOONG, but with a lower target price of RM1.89. Our target price is derived by pegging a target PER of 12.0x to its revised FY23f EPS of 15.7 sen. The ascribed target PER is in line with the mid-sized planters average at around 11.5-13.5x.

• 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.

Source: Mplus Research - 29 Sept 2022