Kumpulan Fima Berhad (KFima)’s share price has been on an uptrend since the beginning of the year. Year-to-date, it has appreciated by 12.5% despite announcing a lower net profit for FY19. We believe the firmer share price performance is supported by its decent dividend yield and healthy balance sheet. KFIMA has been known for its generous dividend payout. The group had consistently been paying healthy dividend yields of between 4.7% and 5.3% over the past five years. However, we see limited earnings growth across all business segments going forward. As such, we are downgrading KFima to HOLD from Buy with an unchanged target price of RM1.89.

Bulking Business is Fueling Up

Our observe that the group’s bulking business is performing well and has been encouraging since 4QFY17. According to management, the strong growth in the edible oils, industrial chemicals and technical fats sub-segments’ throughput was the main driver of growth. High levels of CPO inventories have resulted in higher demand for bulk handling and storage services. In FY19, this division has become the largest profit contributor to the group with a PBT of RM44.4mn (+78.2% YoY). This higher contribution has helped to mitigate the decline in the plantation contributions. Going forward, we believe this segment may negatively be impacted by the effects of potentially low palm oil inventories in the region and the uncertainty in view of the recent trade tension between China and US, which could dampen throughput.

Plantation Division Affected by Low Palm Oil Prices

The plantation unit reported its first revenue contraction in FY19 after five consecutive years of growth. Revenue decreased by 23.0% YoY to RM118.3mn in FY19, mainly dragged by lower sales volume and selling price of CPO and PK. Note that CPO sales volume has decreased by 6.6% YoY to 47k tonnes, while the average selling price of CPO and PK also decreased by 18% and 32% YoY to RM1,921/tonne and RM3,015/tonne, respectively. Excluding the write-back of impairment loss on PPE, PBT would have decreased by 70.9% YoY to RM9.2mn. As at 31 March, 2019, the group has about 14,763.7 hectares which have been planted with around 61% of mature plantations. The anticipated low palm oil price may continue to affect the plantation sector’s performance going forward. We expect FFB production growth to be 6.7% and the CPO price to increase to RM2,055/tonne in FY20 from RM1,921 in FY19. However, higher palm planting cost and cultivation cost (due to increase in young mature areas) may erode margin in this division.

Manufacturing is Improving but Still Not Enough

The manufacturing revenue has been dragged by a decrease in sales volume of certain travel documents (which we believe is the passport printing contract). We understand that the security products have an average lifespan of 5 years, which means the group would not be able to win back major contracts in the immediate term. There have been some new contracts secured, but it is still not generating enough to make up for the loss of the said contract.

Consistent Dividend

KFIMA does not have a formal dividend policy. However, it has been consistently paying dividend of 9sen/share over the past four years. For FY02-22, we expect the group to pay DPS of 9sen/share, which is equivalent to a payout ratio of 60-81%. These dividends will translate to yields of about 5.3%. The group has a healthy balance sheet with a net cash amounting to RM107mn as at 31 March 2019 to support the dividend payments.

Valuation

Maintain KFIMA’s DDM valuation at RM1.89/share. The TP implies a forward CY20 PER of 15.2x. We continue to like KFIMA for its decent dividend yield (5.4%) and strong balance sheet. However, we also see some downside risk to earnings growth. With the

Source: TA Research - 8 Jul 2019