Summary

• Kim Loong Resources Bhd’s (KMLOONG) 3QFY23 net profit fell 10.6% YoY to RM36.7m, mainly dragged by the lower sales quantity and average selling prices of CPO and FFB. Revenue for the quarter declined 18.3% YoY to RM402.4m. A special single tier dividend of 5.0 sen per share, payable on 16th February 2023 was declared.

• For 9MFY23, cumulative net profit added 19.0% YoY to RM125.6m. The reported earnings accounted to 82.6% of our full year net profit forecast of RM152.0m and 74.3% of consensus forecast of RM169.0m. We deem the figures to be in line with expectations that the normalisation of CPO prices would bite into the bottomline in the final quarter of the financial year end.

• As of 3QFY23, KMLOONG total planted area stood at 15,940-ha (relatively unchanged from 2QFY23). KIMLOONG maintained a healthy tree profile (Immature: 11%, Young Mature: 14%, Prime Mature: 29%, Old Mature: 19% and Pre-replanting: 27%). We gather that no re-planting activities took place during the quarter.

• In 3QFY23, KMLOONG’s FFB production rose 13.0% YoY to 79,463 tonnes, while CPO production added 2.6% YoY to 91,854 tonnes. Meanwhile, CPO extraction rate stood at 20.5%; continues to outperform Malaysia’s average CPO extraction rate of 19.7% over the same period highlighting the group’s production efficiency.

• We made no changes to our FFB production assumption of 280,000MT (9MFY23 numbers makes up to 73.3% of our assumption) as we enter into the seasonally high production cycle months. The prompt action from the Malaysian Employers Federation that brought in 373,459 foreign workers into the country since January 2022 is expected to provide some alleviation to the acute labour shortage issue.

• Going forward, we expect CPO prices to trade at an average RM3,500/MT for 2023. The rising inventory level that climbed to 2.3m tonnes in November 2022 highlights that demand remains relatively soft despite total CPO production was flat at 16.8m tonnes in 11M22. We expect challenges to persist from the rising labour, fertiliser and transportation costs that will keep margins in check.

Valuation & Recommendation

• We made no changes to our earnings forecast as we expect the softer CPO prices and elevated fertiliser costs to bite into their margins in the final quarter of the year, while CPO prices is expected to trade at an average RM3,500/MT for 2023.

• We downgrade KMLOONG to HOLD (from Buy) as the recent share price appreciation may have already reflected their fundamentals. Our target price is derived by pegging a target PER of 12.0x to its FY23f EPS of 15.7 sen. The ascribed target PER is in line with the mogeid-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 Dec 2022