Results

• Kim Loong Resources Bhd (KLRB) reported PATAMI of RM16.8m in 3QFY19, which surged 40.1% qoq but tumbled 39.7% yoy.

• QoQ performance was buoyed by higher FFB and CPO production whilst YoY performance was a result of lower FFB production coupled with lower average selling price (ASP) for CPO.

• Within our expectation. 9MFY19’s PATAMI is within ours but below consensus by meeting 73.1% and 67.6% of ours and consensus’ full year net earnings estimates respectively.

Comments

• QoQ performance buoyed by higher FFB production which outweighed lower CPO ASP. Plantation and Milling Operations’ 3QFY19 EBIT elevated 71.2% qoq and 73% qoq to RM10.2 and RM14.1m respectively, underpinned by higher revenue given higher FFB production (+21.3% qoq) outweighed lower CPO ASP (-7.5% qoq at RM2127/mt)

• YoY performance hit by lower ASP and further compounded by lower FFB production. EBIT for Plantation and Milling operations dropped 56.7% yoy and 28.5% yoy respectively. These were due to lower FFB production (-4.2% yoy) and lower CPO ASP (-21.3% yoy). Furthermore, Milling operations’ margin was fazed by lower processing margin (as EBIT margin dropped 0.7 pts to 6.3%).

• Similarly, 9MFY19’s EBIT slid in view of lower CPO ASP and FFB production. Plantation and Milling operations’ 9MFY19 EBIT slid 59.5% yoy and 12.1% yoy respectively in view of lower CPO ASP (-18.3% yoy) and lower FFB production (-12.4% yoy).

• Looking forward, the group expects its FFB production for FY19 to be around 90% of its FY18 production, which is 306.4k MT (slightly higher than last quarter guidance of 289.3k MT). Meanwhile, current FFB intake (1.5m MT) under milling operation remains unchanged. Lower FFB production was mainly due to replanting programs (done 500 hectares replanting in 9MFY19) for old palm areas. Nevertheless, the group expects increasing yield from young mature areas may mitigate the impact. Meanwhile, FFB intake under milling operation expects to be resilient at 1.5m MT as the group continues to maintain high utilization rate.

Earnings Outlook

• We retain our earnings forecasts for FY19F and FY20F.

• Our FY20 earnings forecast is based on FFB Production of 318,283 MT and 1.55m MT intake under 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 maintain our HOLD call with an unchanged target price of RM1.25. We peg our valuation at 14.7x FY20 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 would not improve in short-term given high level of stockpiles despite upward trending of crude oil prices. However, over the longer term, 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 Dec 2018