Results

• Kim Loong Resources Bhd (KLRB) reported net profit of RM33.4m in 2QFY18 which improved 5.2% yoy and surged 66.6% qoq.

• Cumulatively, 6MFY18 net profit almost doubled to RM65.2m from RM34.1m in 6MFY17.

• Above expectations. 6MFY18’s net profit above ours and consensus expectation by matching 82% and 83% of full year earnings estimates respectively mainly due to higher-than expected margin for its plantation operation.

Comments

• Continued growth in 2QFY18 amid lower FFB and average selling price, thanks to better performance in Milling operation. Revenue in plantation operation down by 14.7% qoq to RM45.6m in view of lower FFB production (- 6.5% qoq) and ASP for CPO (-9.5% qoq). On the same note, operating profit in plantation operations dropped 24.3% qoq. Meanwhile, Milling operation’s profit soared by 114.8% qoq to RM13.6m, backed by higher revenue (+1.3%) with tremendous improvement in margin (+2.8 pts to 5.4% from 2.5%), due to ease of competition for crops from surrounding mills.

• Stellar 2QFY18 performance on a yoy basis given recovery in FFB production coupled with higher ASP. Plantation operation and Milling operation’s profits surged by 60.7% yoy and 69.8% yoy respectively in view of higher FFB production (+22.7% yoy) and higher ASP (+8.7% yoy).
   
• Similarly, 6MFY18 performance jumped in view of recovery in FFB production in addition to higher ASP. Plantation operation’s profit elevated by 142.5% yoy to RM60.3m, underpinned by recovery in FFB production (+42.7% yoy) and higher ASP of CPO (+14.4% yoy). Besides that, milling operation’s revenue grew 32.4% yoy whilst operating profit up 22.9% given a slight retreat in margin (- 0.3 pts to 4% from 4.3%).
   
• Looking forward, we expect softening performance in 2HFY18 as anticipating lower ASP for CPO. We believe the recovery in FFB production will lead to lower CPO price in 2HFY18 that limit the performance of the group. Meanwhile, the group has achieved 54.7% of target FFB production of 312000 mt in 1HFY18. Similarly, milling operation has processed 69400mt of FFB, which matched 57.8% of target FFB intake in FY18 (1.2m mt).
   
• Declared interim single tier dividend of 9 sen with ex date on 27 October 2017. The dividend translates into a dividend yield of 2.27% based on current share price. For 2HFY18, we expect the group to declare another 9 sen/share which brings the total dividend to 18 sen/share for FY18 or equivalent to a decent dividend yield of 4.2%.

Earnings Outlook

• We revise upwards our earnings forecasts for FY18 and FY19 by 5-16% in view of higher-than-expected margin for its plantation operation.

• Major risks are 1.) Volatility in palm oil prices; 2.) Fluctuation in FFB production due to weather factors; 3.) Higher-than-expected increase in operating expenses due to shortage of foreign labour in plantation sector.

Valuation/Recommendation

• Maintain BUY call for KLRB with a higher target price of RM 4.59 (previously was RM 4.32), following our earnings upgrade. Our fair value is based on 15.5x FY2018F PE. The PER assigned for valuation is at +1.5 standard deviation above its 5-year historical average PE.

• Overall, we favour KLRB given its prudent management, judging from the consistent earnings performance posted by the group for the past few years as well as its generosity of management in rewarding shareholders. Looking forward, we opine that the catalyst for the stock would be the setup of new milling plant in Sarawak and expansion of its plantable land.

Source: JF Apex Securities Research - 29 Sept 2017