Results

• Kim Loong Resources Bhd (KLRB) reported a PATAMI of RM10m in 2QFY20, which tumbled 28% qoq and 13% yoy.

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

• Below expectations. 6MFY20’s PATAMI only meets 37% and 33% of ours and consensus full year earnings estimates respectively.

Comments

• Low production and weak CPO ASP weighed on plantation operation. Plantation operation’s EBIT slid 34% qoq and 13% yoy to RM5.2m in view of lower FFB production (-16% qoq; +8% yoy) and lower CPO ASP (-3.5% qoq; -16% yoy). As such, 6MFY120s EBIT slumped 61% yoy to RM43m amid flat FFB production (+1% yoy) and lower CPO ASP (-17% yoy).

• Similarly, Milling operation fazed by lower CPO ASP despite higher sales quantity recorded. 2QFY20’s EBIT declined 75% qoq and 58% yoy to RM3.4m under milling operation was a result of lower CPO ASP, and further bogged down by lower processing margin achieved. Cumulatively, EBIT was recorded at RM43.4m, which was lower by 15% YoY.

• Lower FFB production was mainly due to seasonal factor as FFB production from the company’s mature estates is normally low during the 2nd quarter of each year and will rise in the 3rd quarter, peak in the 4th quarter and slowly decline in 1Q. Management noted that the drop in FFB production (-15% QoQ to 12,000 MT) is broadly in line with the FFB yield performance in Sabah.

• Declared interim dividend of 3 sen per share. We expect another dividend of 2 sen per share to be declared in 2HFY20. As such, total dividend for FY20 could end up at 5 sen per share, which translates into a dividend yield of 4.4% based on current share price of RM1.14.

Earnings Outlook

• We slash our earnings forecasts for FY20F and FY21F by 17.5% and 15.7% respectively after taking account lower FFB production coupled with soft CPO ASP outlook.

• Our FY20 earnings forecast is based on FFB Production of 294,558 MT and 1.55m MT intake under the Milling Operation with CPO average selling price of RM2000.

• 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 RM1.00 (previously was RM 1.25) after rolling over our valuation to FY21F. Our target price is now pegged at 14.7x FY21F 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 - 30 Sept 2019