Kim Loong Resources Berhad’s (KIML) held a visual briefing yesterday post the release of its 2QFY23 results. Overall, management expects a better performance for FY23, premised on higher palm oil prices and improving Fresh Fruit Bunches (FFB) production. The cost of production is expected to trend downward with increasing yield and lower fertiliser cost in 2HFY23. As such, we reiterate our BUY recommendation on KIML with an unchanged target price of RM1.97, based on 20x CY23 EPS.

Record Results in 2QFY23

According to management, the 2QFY23 was the best quarter ever for KIML, with a record-high profit of RM49.7mn, thanks to higher average selling prices of FFB (+33.1% YoY) and CPO (+41.0% YoY). Cumulatively, 1HFY23 profit surged by 37.8% YoY to RM88.9mn. Management expects the FFB production to increase by around 10% to 291k tonnes in FY23, underpinned by yield recovery and supported by the contribution from new mature areas (~1k ha) as well as newly acquired land (refer to Figure 1).

Cost of Production to Ease in 2HFY23

According to management, the cost of production (ex-mill) has increased to RM2,370/tonne in 1HFY23 compared to RM1,670/tonne in FY22. The higher cost is mainly attributable to 1) increase in minimum wages, ii) lower FFB yield, iii) higher fertiliser cost and iv) higher windfall levy absorbed. However, management expects the cost of production to trend lower in 2HFY23 with increasing yield and lower fertiliser cost. The group is still facing a labour shortage of about 10% to 20% of the requirement and the harvesting time has extended to as long as 30 days from the usual 15 days.

Still Actively Looking to Set Up a Palm Oil Mill in Sarawak

KIML is still actively looking into setting up a palm oil mill in Sarawak to support its plantation operations. The group does not have any palm oil mill in Sarawak currently. As such, the FFB produced from its estates in Sarawak has to be sold to a third-party mill. We have mentioned previously, with own palm oil mill, KIML’s gross profit margin is expected to improve and contribute positively to the bottomline as building a new mill can be economical when more trees come to maturity. To recap, the planned mill is expected to have a milling capacity of about 60 tonnes per hour and increase the group’s total milling capacity by 24% to 1.86mn tonnes per annum.

Valuation

Maintain KIML as BUY with an unchanged TP of RM1.97/share, based on 20x CY23 EPS. Key risks are, i) a downcycle in CPO price, ii) escalation in production cost, iii) global economic slowdown, iv) lower-than-expected FFB production, and v) increasing supply of soybean oil in the market.

Source: TA Research - 6 Oct 2022