What’s new

• Better outlook - We concluded a teleconference call with Kim Loong Resources Bhd’s (KLRB) Management team recently and foresee a slightly better outlook for the group in view of earnings boost from the sales of Biomass-generated electricity.

• Contribution from renewable energy is expected to kick-in in 2HFY20 (2HCY19) - We understand that the earnings generated from the sales of Biomass-generated electricity to Sustainable Electricity Development Authority (SEDA) is expected to kick-in in second half of FY20 which would improve the group’s earnings.

Comments

• Series of replanting activities to be continued for the next 5-6 years – The group has carried out replanting of about 680 ha in FY19. Looking forward, the group plans to replant 800-100 ha in FY20. Meanwhile, replanting activities will be continued for the next 5-6 years. We understand that the replanting cost incurred could be around RM12-15k per ha before turning mature.

• FFB production growth is expected to be flat in FY20 – The group’s FFB production in FY19 was 310,082, down 8.9% yoy given smaller mature area (13,900 hectares) and lower FFB yield/Mature Ha of 22.31. Meanwhile, the immature area for FY19 was c.1046 Ha. The group expects FFB production in FY20 to be flat as mature area to be more or less same as FY19.
• Plantation land is scarce. We understand that the group is looking for palm oil land to expand its FFB production capacity. In view of government’s initiative to curb rising palm oil land, the group is only able to acquire existing brown field land, which is deemed expensive. As such, the group would adopt prudent and care to ensure sound decision is made.
• In the midst of getting licence for Sarawak Palm Oil mill – We learnt that the group is still in the midst of getting licence for its Sarawak Palm oil mill and the management is uncertain on the timeline. Nevertheless, the group is working hard to get licence for Sarawak Palm Oil mill.

• Utilisation rates for its 3 existing palm oil mills are at maximum capacities with 1.5m MT FFB inputs – Its 3 existing palm oil mills which are Kota Tinggi Mill, Keningau Mill and Telupid Mill have reached their own maximum capacity. The group managed to produce 329,489 MT of CPO in FY19, which was equivalent to a CPO oil extraction rate of 21.78%. Looking forward, we expect FFB intake under milling operation in FY20 to be 1.5m MT.

• Biomass-generated electricity earnings to kick in 2HFY20 – We understand that the group has secured 2 contracts with SEDA to sale its renewable energy - 2 MW for its Keningau Mill and 1.8 MW for its Kota Tinggi mill. The construction of power planta are on-going with expected completion timeline in mid of 2019 (2HFY20). The group expects an earnings boost of RM8m per annum to flow in after the completion of the construction. Nevertheless, the total construction cost is about RM15m. Besides that, we also learnt that the group is trying to obtain another 1.2MW renewable energy contract for its Telupid mill from SEDA.

Earnings Outlook

• We tweak down our earnings forecast for FY20 by 3.6% but lift earnings forecast for FY21 by 6% after some housekeeping and including earnings from SEDA.

• Our FY20 earnings forecast is based on FFB Production of 309,618MT and 1.50m MT intake under Milling Operation with a lower CPO average selling price of RM2250/MT.

• 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. 4.) lower-than expected SEDA’s earnings

Valuation/Recommendation

• We upgrade the stock to BUY form HOLD with higher target price of RM1.32 (previously was RM1.19). Our target price is derived at 14.7x PER with FY22 EPS of 9 sen. The ascribed PER is at +1 standard deviation above its 3-year trailing PE given: 1) catalyst from renewable energy segment, 2) prudent management and 3) decent dividend payment.

Source: JF Apex Securities Research - 26 Apr 2019