Results

• Kim Loong Resources Bhd (KLRB) reported a PATAMI of RM3.1m in 4QFY19, tumbling 81.3% qoq and 83.7% yoy.

• Lacklustre QoQ and YoY performance was due to weak CPO average selling price (ASP).

• Below expectations. 12MFY19’s PATAMI is below ours and consensus’ expectation by meeting 77.8% and 71.9% of ours and market full year earnings estimates respectively. The unfavourable performance was mainly attributed to soft CPO ASP coupled with higher operating expenses.

Comments

• QoQ performance was bogged down by weak CPO ASP which outweighed higher FFB production. Plantation and Milling Operations’ 4QFY19 EBIT slid 10.9% qoq and 40.2% qoq to RM9.1 and RM8.4m respectively. These were due to lower CPO ASP (-12.5% qoq at RM1862/mt) which outweighed higher FFB production (+27.8% qoq)

• On the same note, YoY performance was weighed down by soft CPO ASP despite slight growth in FFB production. EBIT for Plantation and Milling operations dropped 66.7% yoy and 26.4% yoy respectively in view of weaker CPO ASP (-26.2% yoy). Nevertheless, the Group achieved marginally higher FFB production growth, +2.5% yoy.

• 12MFY19’s EBIT slid in tandem with lower CPO ASP and FFB production. Plantation and Milling operations’ 12MFY19 EBIT slumped 61.2% yoy and 15.3% yoy respectively in view of lower CPO ASP (-20.2% yoy at RM2169/mt) and lower FFB production (-8.9% yoy at 310,082 mt). Lower FFB production was mainly attributed to estates in Sabah (as record production in FY18).

• As of FY19, total planted area for the group is 14,946 ha. Out of total planted area, 7% is immature (<3 years) and 8% is under the pre-planting (>20 years) stage. The group has carried out replanting of about 680 ha in FY19.

• Looking forward, the group expects its FFB production for FY20 to be on par with FY19 production, which is 310k MT. Flat production growth is due to drop in oil palm production area that mitigated by increasing yield from young mature areas.

• Meanwhile, milling operations has processed 1.48m MT of FFB in FY19, which was marginally below the group’s target of 1.5m MT. We expect FFB intake under milling operation in FY20 to be resilient at 1.55m MT as the group continues to maintain high utilization rate.
• Proposed final single tier dividend of 3 sen per share with ex-date on 7 August 2019. As such, total dividend for FY19 is 6 sen per share, 1 sen higher than our expectation. Overall, it translates into a dividend yield of 4.76% based on current share price.

Earnings Outlook

• We cut our earnings forecast for FY20 by 20% after taking into account of weak CPO ASP and higher operating expenses. Meanwhile, we introduce our earnings forecast for FY21, with a yoy growth of 19.1%.

• Our FY20 earnings forecast is based on FFB Production of 311,632MT and 1.55m MT intake under Milling Operation with a lower CPO average selling price of RM2250/MT (RM2400/MT previously).

• 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.

Valuation/Recommendation

• We maintain our HOLD call with a lower target price of RM1.19 following our earnings cut. We roll over our valuation and peg at 14.7x PER of FY21 EPS. The ascribed PER is at +1 standard deviation above its 3-year trailing PE given its prudent management and decent dividend payment.

• Overall, we envisage that prevailing soft CPO prices to remain unchanged in the short-term given high level of stockpiles. 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 - 27 Mar 2019