We initiate coverage on Kim Loong Resources Berhad (KIML) with a BUY rating and a target price of RM2.16, based on CY23 PER of 20x. We are positive on the long-term fundamentals of KIML and believe the group has a strong future growth in FFB production, underpinned by improving tree age profile. Besides, the group is well-positioned to build a M&A war chest to accelerate its revenue growth in the future thanks to its healthy balance sheet.

Investment Case

New Acquisition to Boost FFB Production. The recent acquisitions of four pieces of oil palm plantation lands in Sabah would increase the supply of FFB to the group’s palm oil mill in Telupid, Sabah and this will contribute towards optimising utilisation of the mill’s processing capacity as well as to reduce dependence on FFB supply from third parties especially during a seasonal low crop period. KIML has three palm oil mills with a total FFB processing capacity of 1.5mn tonnes per annum and the utilisation rate is about 95% in FY22. We gathered that around 85% of the FFB processed are sourced from the third parties.

Sustainable High Oil Yield. KIML has been able to sustain its high CPO extraction rate (OER) of more than 20%. The OER achieved over the last six years was higher than Malaysia’s average. According to management, proper management with great efficiency, effectiveness and sufficient manuring input are key factors attributable to better yield performance.

Healthy Balance Sheet to Make Ready for Acquisition Opportunities. KIML has a healthy balance sheet with RM344.4mn net cash as at 31 Jan 2022. Thus, we believe the group is well-positioned to build a M&A war chest to accelerate its revenue growth in the future.

High Dividend Payout. KIML does not have a formal dividend policy. However, the group has been making substantial dividend payout of 68.7% to 107.5% over the past five years. We expect the group to pay DPS of 17sen/10sen/10sen for FY23/FY24/FY25, which is equivalent to a payout ratio of 90-95%. These dividends translate to a yield of 6% to 10%.

Forecast and Assumptions

We expect KIML’s FY22 revenue to surpass the RM2bn mark while the net profit to increase to RM187.4mn (+38.4%). Subsequently, FY24 and FY25 revenues are projected to decrease to RM1.52bn and RM1.53bn, respectively. With this, F24 and FY25 net profit are expected to be RM98.6mn and RM98.8mn respectively, on the back of lower revenue.

• FY23/FY24/FY25 FFB production growth of 16%/5%/3%.

• Average CPO price of RM5,500/RM4,000/4000 per tonne for CY23/CY24/CY25.

Source: TA Research - 17 Jun 2022