Results

• Kim Loong Resources Bhd (KLRB) reported a PATAMI of RM27.9m in 3QFY18, up 1.4% qoq and 11.2% yoy.

• Cumulatively, 9MFY18 PATAMI surged to RM79.8m from RM54.6m, +46.2% yoy.

• Above expectations. 9MFY18’s PATAMI above our and consensus expectation by matching 86.3% and 82.5% of full year earnings estimates respectively mainly due to better than-expected performance for its milling operation.

Comments

• 3QFY18 (QoQ) performance lifted by Milling operation despite a slight drop in plantation operation. Plantation operation’s EBIT inched down 1.3% qoq given lower FFB production (-6.3% qoq). However, milling operation’s EBIT surged 44.8% to RM19.8m on the back of better processing margin and higher processing quantity.

• 3QFY18 (YoY) performance was buoyed by higher FFB production in plantation operation and better margin in Milling operation. Plantation operation’s EBIT up 11.5% yoy as growth in FFB production (+13.9%yoy) outweighed a drop in average selling price (-2% yoy). Meanwhile, milling operation’s EBIT improved 6.7% yoy, underpinned by a better processing margin as a result of ease of competition for crops from surrounding mills.

• 9MFY18’s EBIT surged 60% yoy given a stellar performance in plantation operation which was boosted by a recovery in FFB production. Plantation operation’s EBIT doubled to RM85.9m from RM42.3m. The stellar performance was mainly attributed to recovery in FFB production (+32.2% yoy) and compounded by higher CPO ASP (+8.9% yoy). We learnt that high FFB production was substantially contributed by the estates in Keningau region. Nevertheless, milling operation EBIT’s improved by 14.3% yoy on the back of higher processing quantity and a better margin.

• Looking forward, the group expects FFB production to achieve a growth of 30% yoy under plantation operation and 0.25m growth in FFB intake under milling operation. With the new guidance by the group, FFB production is expected to achieve additional production of 15,500 mt to 327,500 mt as compared to previous guidance of 312,000 mt. Besides that, FFB intake under milling operation also being revised upwards by 0.2m to 1.4m. The group has achieved 75.8% and 78.2% thus far for FFB production and FFB intake target respectively for FY18.

• Proposed 3-for-1 share split. The enlarged share based after this exercise will be 935.41m (from 311.8m). Meanwhile, theoretical adjusted market price will be RM1.37 (based on current share price of RM4.11). We are positive with the corporate exercise as it will improve shares liquidity of the stock (higher number of shares coupled with lower entry price), as welcomed by investors.

• Thereafter, proposed free warrants on the basis of 1 warrant for every 20 subdivided shares with exercise price to be determined later. We understand that the bonus of free warrants will have tenure of 7 years and may be exercised at any time during the tenure. The enlarged share based will further increase to 980.284m after taking into account for both the share split and free warrants.

• Declared special single-tier dividend of 6 sen per share with ex-date on 10 Jan 2018. We expect the group declare another 9sen/share in 4QFY18 which brings its total dividend to 27sen/ share for FY18, translating into an attractive dividend yield of 6.5% based on current share price.

Earnings Outlook

• We revise upwards our earnings forecasts for FY18F and FY19F by 3-8% after adjusting for higher FFB production growth and FFB intake.

• 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

• Upgrade to BUY from HOLD for KLRB with an unchanged target price of RM 4.59 after we roll over our valuation and peg at 15.5x FY2019F PE. The PER assigned for valuation is at +1.5 standard deviation above its 5-year historical average PE.

• We opine that value re-emerges following the recent retreat in share price coupled with positive news on share split and free warrants exercise and declaration of special dividend. We foresee share price to be less volatile after the corporate exercise in view of better share liquidity.

• 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 - 26 Dec 2017