KUALA LUMPUR (Jan 2): Apex Securities has initiated coverage on Kim Loong Resources Bhd with a “hold” call and a target price (TP) of RM1.84, premised on Kim Loong’s resilience during challenging times. The TP is based on a 14.2 times price-earnings ratio (PE).

In a note on Tuesday, Apex Securities stated that Kim Loong has maintained a sturdy cash position on the balance sheet, representing 20% to 32% of its total assets over the past five years with approximately RM5.4–8.8 million of interest income earned.

It is worth highlighting that Kim Loong's net cash position has steadily increased from RM175.4 million to RM341.4 million between FY19 and FY23, the research house said.

Aside from the robust balance sheet, Kim Loong performed well in terms of dividend yield, and it has consistently upheld a dividend payout ratio exceeding 70% over the last five years.

Against the backdrop of the steady generation of operating cash flow (OCF), Kim Loong managed to distribute substantial dividends to its shareholders even when facing a low-cycle period, said Apex Securities.

“Looking ahead, we anticipate a slightly reduced dividend payout of 80% [compared to the 90% payout in FY23] due to the weakness in crude palm oil’s [CPO] average selling price. Nonetheless, this still represents an appealing dividend yield of 5% in FY24,” it added.

Meanwhile, with stable earnings, Kim Loong's one-year share price outperformed the plantation index by 15.6% as of December 2023, proving its resilience in navigating the downturn in the plantation sector, said Apex Securities.

The growth of Kim Loong is underpinned by target fresh fruit bunches (FFB) production of 312,000 tonnes in FY24F, a 15% of production growth driven by mature planted palm oil land of 14,300 hectares (ha) and 21.5 tonnes/ha FFB yield coupled with a better yield profile of young mature palms, it stated.

It reckons FFB production yield should remain strong, supported by the excellent mix of tree age and the large portion of mature palm oil trees is expected to sustain revenue growth going forward.

Despite the gradual decline in CPO prices, Apex Securities believes the milling operation of Kim Loong could cushion the weakness in the CPO price.

In FY23, the milling business contributed to over 97% of the company's total revenue, it said.

Looking forward, the research house anticipates that the average CPO price for 2023 will close on a softer note, primarily attributed to increased production surpassing demand.

Nonetheless, it foresees a potential softening in CPO production, particularly in the second half of 2024, as palm oil plantations begin to experience the effects of dry weather.

Consequently, it reckons CPO prices might rebound in the following year to RM4,000/tonne, it said.

“We are positive on Kim Loong’s earnings growth prospects, given its prudent management, judging from the consistent performance posted by the group for the past few years, as well as the generosity of management in rewarding shareholders,” it added.

At the time of writing, Kim Loong was traded at RM2.02 per share, translating into a market capitalisation of RM1.96 billion.