INVESTMENT MERIT

We revise our call on KMLOONG to Take Profit (from Trading Buy) with an unchanged TP of RM3.66 (average FY18-19E Fwd. PER of 14.0x), reflecting the strong returns since our previous report. In line with the sector, drought effects impacted FY17 FFB production (-16%) resulting in slightly lower NP (-3%) despite better prices (+25%). We expect FY18-19E NP of RM78-85m on production recovery. Long-term prospects remain solid on Sarawak expansion.

Good return to shareholders. Since our Trading Buy call on Kim Loong Resources (KMLOONG), published 9-Jun-16, the share price has appreciated by 10.0% to RM3.73, and over the same period, the company declared dividends totaling 20.0 sen for a dividend yield of 5.4%, resulting in a total return of 15.4%.

Drought effect seen in FY17. In line with the sector, KMLOONG FFB production suffered the drought effects of 2015, with FY17A FFB production falling 16% to 251.9k metric tons (MT). This was offset by stronger CPO prices at a full-year average of RM2,680/MT (+25% YoY) which led to a 34% revenue jump to RM1.01b. However, weaker production led to higher cost per MT and dampened net margins to 7.0%, the lowest level in the last 5 years. As a result, net profit slipped slightly (-3%) to RM71.3m.

Gradual recovery ahead. With the drought effect lowering FFB yields from an average of 22MT/hectare (ha) to 18MT/ha in FY17A, we lower our FY18E yield estimate from 22MT/ha to 19MT/ha reflecting gradual recovery. Hence, we estimate FFB production to improve by 13-8% in FY18-19E, slightly above the sector average growth of 8-8%. Note that our FY18E forecast is on the conservative side against management’s expected 20% growth. As higher production leads to lower cost/MT, margins should normalize towards the historical 9%. However, with a lower yield estimate, our FY18E earnings forecast is trimmed by 8% to RM78.0m.

Looking to expand Sarawak operations. Recall in our previous report we mentioned management intends to continue its expansion phase in Sarawak via its 70-30 JV with state government agency Pelita. We understand that management is also “actively looking into the possibility of setting up a palm oil mill in Sarawak”. We continue to be positive on further development in Sarawak, as its existing young acreage should contribute positively to FFB growth over the long run.

Trim FY18E CNP by 8% to RM78.0m while introducing FY19E CNP of RM84.7m. We lower our FY18E CNP by 8% as we turn more conservative on yield prospects reflecting gradual recovery from 2015 droughts. We also introduce our FY19E forecast of RM78m driven by FFB growth of 8%, which is in line with the sector outlook.

Recommend investors Take Profit (from Trading Buy) at unchanged Target Price of RM3.66. We maintain our Target Price at RM3.66 which is based on unchanged Fwd. PER of 14.0x applied to average FY18-19E EPS of 26.1 sen. Our Fwd. PER of 14.0x implies a +1.0SD valuation basis, which is justified by KMLOONG’s slightly above-average growth prospect and solid balance sheet with a net cash position of 70.2 sen comfortably supporting long-term growth plans. Nevertheless, we believe the current share price reflects company fundamentals; and in view of our softer CPO price outlook in 2HCY17, we advocate investors to Take Profit on the stock and perhaps look to revisit the stock closer to end-2017, after the impending sector-wide production upswing has run its course.

Source: Kenanga Research - 11 May 2017