Summary

• Kim Loong Resources Bhd’s (KMLOONG) 1QFY24 net profit fell 19.7% YoY to RM31.5m, mainly dragged down by the sharp decline in average selling prices of FFB and CPO that offset the better production. Revenue for the quarter decreased 35.9% YoY to RM326.7m.

• The reported earnings were in line, accounting to 25.9% of our full year net profit forecast of RM121.8m and 25.2% of consensus forecast of RM125.0m. We noted that as at 1QFY24, KMLOONG operates in a healthy balance sheet with a net cash position of RM304.1m.

• As of 1QFY24, KMLOONG total planted area stood at 15,940-ha (relatively unchanged from 4QFY23). KIMLOONG maintained a healthy tree profile (Immature: 5%, Young Mature: 19%, Prime Mature: 26%, Old Mature: 19% and Pre-replanting: 31%). We gather that no re-planting activities took place during the quarter.

• During the quarter, KMLOONG’s FFB production climbed 19.3% YoY to 72,831 tonnes, which accounts to 24.5% of our projection at 297,000 tonnes, while CPO production added 3.6% YoY to 67,200 tonnes. Meanwhile, CPO extraction rate stood at 20.5%; continues to outperform Malaysia’s average CPO extraction rate of 19.6% over the same period highlighting the group’s production efficiency.

• Although CPO prices hovered largely below our assumption of RM4,000/MT in 2023, we reckon that downside will be cushioned by the onset of the periodic dry weather phenomenon (El Nino) that threaten production. According to the Environment Minister Nik Nazmi Nik Ahmad, this phenomenon may extend into April 2024. Still, we expect upsides to be capped as demand may remain sluggish, owing to the worsening of global economic outlook, persistently high inflation and elevated interest rates environment.

• Malaysia palm oil stocks rose 12.6% MoM to 1.7m tonnes in May 2023, driven by the higher CPO production following the easing of labour shortage, while palm oil export fell -0.8% MoM during the month. This suggests that concerns over weaker demand may outweigh the prospects of tighter supply. Likewise, Indonesia’s palm oil export fell 19.2% MoM in April 2023 to 2.1m tonnes, highlighting the sluggishness in demand. On a brighter note, fertiliser prices which accounts to majority of the production costs has started to ease. This is also in line with the normalising freight cost, which bodes well for the group’s margins.

Valuation & Recommendation

• Given the reported earnings came largely in line, we made no changes to our earnings forecast as we expect CPO prices is expected to trade at an average RM3,500-4,000/MT for the remainder of the year.

• We maintained our HOLD recommendation on KMLOONG with an unchanged target price of RM1.89. Our target price is derived by pegging a target PER of 15.0x to its FY24f EPS of 12.6 sen. The ascribed target PER is in line with the mid-sized planters average at around 13.5-15.5x.

• 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.

Source: Mplus Research - 30 Jun 2023