Summary

• Kim Loong Resources Bhd’s (KIMLOONG) 1QFY23 net profit gained 38.2% YoY to RM39.2m, driven by the higher average prices of CPO and FFB at RM6,309/MT and RM1,262/MT respectively during the quarter vs. RM3,991/MT and RM808/MT respectively recorded in 1QFY22, coupled with the mild improvement in production. Revenue for the quarter added 63.1% YoY to RM509.7m.

• The reported earnings accounted to 29.3% of our full year net profit forecast of RM133.8m and 21.0% of consensus forecast of RM187.0m. We deem the figures to be in line, in anticipation of softer quarters ahead that will be tracking the normalisation of CPO prices which has already begun since early June 2022.

• As of 1QFY23, KIMLOONG total planted area stood at 15,939-ha (unchanged from 4QFY22). During the quarter, KIMLOONG continues to maintain a healthy tree profile (Immature: 17%, Young Mature: 8%, Prime Mature: 29%, Old Mature: 19% and Pre replanting: 27%). We gather that no re-planting activities took place during the quarter as KIMLOONG aims to leverage onto the elevated CPO prices.

• In 1QFY23, KIMLOONG’s FFB production added 7.3% YoY to 61,075 tonnes, while CPO gained 1.7% YoY to 64,861 tonnes. Meanwhile, CPO extraction rate stood at 20.7%; continues to outperform Malaysia’s average CPO extraction rate of 19.6% over the same period highlighting the group’s production efficiency.

• For FY23f, we have imputed a FFB production assumption of 280,000MT (1QFY23 numbers makes up to 21.8% of our assumption). We expect production to improve in subsequent quarters as labour shortage issues may see some alleviation. Meanwhile, we take note that biogas plants at Keningau and Telupid mills are expected to commence operation to supply power grid by end of 2QFY23.

• Moving forward, we expect CPO prices to remain elevated above RM4,000/MT in the remainder of the year. This is premised to the sustainable demand from China and India, coupled with the on-going production constraints amid the acute labour shortage in Malaysia.

Valuation & Recommendation

• With the reported earnings deemed to be within expectations, we made no changes to our earnings forecast. We, however, upgrade KIMLOONG to BUY (from Hold), with an unchanged target price of RM1.94 as valuations have now turn more appealing after the recent pullback in its’ share price.

• Our target price is derived by pegging a target PER of 14.0x to its FY23f EPS of 13.8 sen. The ascribed target PER is in line with the mid-sized planters average at around 13.5-15.5x.

• Risks to our recommendation include fluctuations in CPO prices. The volatility of CPO prices is subject to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could also affect CPO prices as both products are regarded as substitutes. The environmental, social and governance (ESG) issues in regards to deforestation and labour-related also continues to beset the overall plantation sector.

Source: Mplus Research - 29 Jun 2022