Kim Loong Resources Berhad’s (KIML) held a visual briefing yesterday post  the release of FY23 results. The FFB production is expected to rise by 15% in  FY24, mainly driven by yield recovery and additional mature areas,  especially from Sabah estates. However, management expects earnings to  trend weaker in FY24 due to lower palm oil prices following recordbreaking earnings in FY23. We reiterate our SELL recommendation on KIML  with an unchanged target price of RM1.75, based on 16x CY24 EPS.

Lower Earnings in FY24

According to management, the group registered record-breaking earnings in FY23  mainly driven by higher average selling prices of FFB (+10.6% YoY) and CPO (+9.1%  YoY). However, earnings are expected to trend weaker in FY24 with normalising  of CPO prices despite rising FFB production. Management expects the FFB  production to increase by 15% to 329k tonnes in FY24, underpinned by yield  recovery and supported by the contribution from new mature areas, especially from  Sabah estates. Besides, management guided that the group would resume major  replanting activity from 2024 onwards. There was no replanting carried out in FY23  while in FY22, the group replanted 520 ha of the plantation estates.

Cost of Production to Remain Flat or Slightly Reduce

According to management, the cost of production (ex-mill) has increased to  RM2,150/tonne in FY23 compared to RM1,670/tonne in FY22. The elevated cost  was mainly attributable to 1) increase in minimum wages, ii) lower FFB yield, iii)  higher fertiliser cost, and iv) higher windfall levy absorbed. Looking forward,  management expects the cost of production to remain flat or slightly drop in FY24.

Labour Shortage of 10-20% of Requirement

The group is still facing a labour shortage issue of about 10% to 20% of the  requirement. As such, the harvesting time has extended to over 20 days from the  usual 15 days. The current land-labour ratio is one worker for more than 20 ha and  management hopes to reduce it to the ideal ratio of 18 ha per worker. According  to management, there are some delays in receiving foreign workers from Indonesia  currently.

Better Contribution from Biogas Plant

KIML registered lower revenue of RM4.6mn from supplying power to the TNB grid  from its biogas plant in FY23 due to breakdowns of biogas engines. Going forward,  management expects the revenue to grow as the biogas plant in Keningau has  commenced the power supply to Sabah Electricity Sdn Bhd (SESB) in Dec 2022  while another biogas plant in Telupid is expected to commence operation in  2HFY24. We understand that the excess electricity can be sold for about 46  sen/kilowatt.

Valuation

No change to our earnings forecast. Maintain KIML as SELL with an unchanged TP of RM1.75/share, based on 16x CY24 EPS.

Source: TA Research - 5 Apr 2023