Results

• Kim Loong Resources Bhd (KLRB) reported a PATAMI of RM12m in 2QFY19, which tumbled 40.3% qoq and 56.4% yoy.

• Lacklustre performance was mainly due to lower FFB production and further compounded by softening CPO average selling price (ASP).

• Below expectations. 6MFY19’s PATAMI only met 33.4% and 32.6% of ours and consensus full year earnings estimates respectively.

Comments

• Low production in Keningau region and weak CPO ASP weighed on plantation operation. Plantation operation’s EBIT slid 66.5% qoq and 77% yoy to RM6m in view of lower FFB production (-25.8% qoq; -26% yoy) and lower CPO ASP (- 4.9% qoq; -15% yoy). As such, 6MFY19’s EBIT slumped 60.5% yoy to RM23.8m, again, no thanks to lower FFB production (- 16.1% yoy) and CPO ASP (-17% yoy).

• Similarly, Milling operation fazed by lower CPO ASP despite higher sales quantity recorded. 2QFY18’s EBIT down 35.3% qoq and 40.1% yoy to RM8.2m under milling operation was a result of lower CPO ASP, and further bogged down by lower processing margin achieved. Cumulatively, EBIT was recorded at RM20.8m, which was marginally up by 4% given a low base in 6MFY18 (bogged down by 1QFY18 performance).

• Looking forward, the group expects a lower FFB production of 289.3k MT (previous guidance was 306.4k MT) which contracts 15% yoy. However, current FFB intake (1.5m MT) under milling operation is remain unchanged. Lower FFB production was mainly due to replanting programs (completed 300 hectares replanting during 6MFY19) for old palm areas. Nevertheless, the group expects to see increasing yield from young mature areas which may mitigate the adverse impact. Meanwhile, FFB intake under milling operation expects to be resilient at 1.5m MT in view the group continues to maintain high utilization rate.

• Declared interim single-tier dividend of 3 sen per share.

We expect another dividend of 2 sen per share to be declared in 2HFY19. As such, total dividend for FY19 could end up at 5 sen per share, which translates into a dividend yield of 3.9% based on current share price of RM1.31.

Earnings Outlook

• We slash our earnings forecasts for FY19 and FY20 by 30% and 21% respectively after taking account lower

FFB production guidance coupled with soft CPO ASP outlook.

• Our FY20 earnings forecast is based on FFB Production of 318,283 MT and 1.55m MT intake under the Milling Operation with CPO average selling price of RM2400.

• 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

• We downgrade our KLRB BUY call to HOLD with a lower target price of RM1.25 (previously was RM 1.52) after rolling over our valuation to FY20F with lower earnings. Our target price is now pegged at 14.7x FY20F EPS. The PER assigned for valuation is at +1 standard deviation above its 3-year trailing PE given its prudent management.
• Overall, we envisage that prevailing soft CPO prices will not improve in short-term given high level of stockpiles despite upward trending of crude oil prices. Nevertheless, we opine that the possible 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 - 28 Sept 2018