Results

• Kim Loong Resources Bhd (KLRB) reported a PATAMI of RM21.1m in 1QFY19, up 4.3% qoq but down 17.2% yoy.

• Higher QoQ performance was attributed to lower minority interest allocation in 1QFY19. Meanwhile, lower YoY performance was bogged down by lower production and CPO average selling price (ASP).

• Within expectations. 3MFY19’s PATAMI within ours and consensus expectation by matching 20.9% and 20.4% of full year earnings estimates respectively.

Comments

• Lower FFB production and CPO ASP impeded QoQ performance. Plantation operation’s EBIT dropped 34.8% qoq to RM17.8m in view of lower FFB production (-10.9% qoq) and lower CPO ASP (-4.1% qoq). Nevertheless, milling operation came to rescue with its EBIT improved 10% qoq. Better performance in milling operation was underpinned by a better processing margin given higher utilisation rate.

• On the same note, 1QFY19 (YoY) performance bogged down by lower FFB production and CPO ASP. Plantation operation’s EBIT slid 27.5% yoy, no thanks to lower FFB production (-6.8% yoy) and lower CPO ASP (-19.1% yoy). However, the better performance in milling operation mitigated the negative impact. The encouraging result in milling operation was attributed to better margin achieved despite lower revenue. Meanwhile, the lower revenue in milling was a result of low CPO ASP despite higher sales volume recorded.

• Looking forward, the group expects a FFB production of 306.4k MT which contracts 10% yoy. However, current FFB intake (1.5m MT) remains unchanged under milling operation. The lower FFB production was mainly due to replanting programs (completed 100 hectares replanting in 1QFY19) for old palm areas. Nevertheless, the group expects increasing yields from young mature areas may mitigate the impact. Meanwhile, FFB intake under milling operation is expected to be resilient at 1.5m MT as the group continues to maintain high utilization rate.

Earnings Outlook

• No change to our earnings forecasts for FY19 and FY20.

• Our FY20 earnings forecast is based on FFB Production of 325,500 MT and 1.55m MT intake under Milling Operation with CPO average selling price of RM2550.

• 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 on KLRB with an unchanged target price of RM 1.52. Our valuation pegged at 15.5x FY2019F 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 (5.6% dividend yield for FY19F). 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 Jun 2018