We recently conducted a virtual meeting with the management of Kim Loong Resources Berhad (KIML) with a few key takeaways. Going ahead, the group is focused on earnings recovery in FY25. Management expects a 5% growth in FFB production and explores new revenue streams, such as coconut plantations. We keep our TP at RM2.50/share but downgrade KIML from Buy to HOLD due to limited upside potentials.

Financial Performance & Growth

In FY23, the group delivered a record-breaking performance, though FY24 suffered a slight decline. For FY25, the group’s main focus would be returning the company to growth trajectory. Capex for FY25 is projected at RM60mn, primarily allocated to upgrading mill equipment and replanting efforts, with an additional USD80mn earmarked for the construction of a new mill in Sarawak over the next 2-3 years. Although the official dividend policy targets a 30% profit distribution, the group has consistently paid out over 80% in recent years. However, in FY24, the dividend payout was slightly reduced due to earnings pressure.

Plantation Operations

The group has maintained a replanting rate of about 1,000 ha per year, which is expected to continue over the next five years. This year, the group would strive to increase the production to 350k tonnes from estimated 330k tonnes in FY24. The oil extraction rate (OER) currently stands at 20.61% with an average CPO yield of 4.58tonnes/ha, surpassing the national average for Malaysia. Additionally, the group has invested in three biogas plants, which now provide the excess power to the grid for some additional revenue. The Kota Tinggi plant has been operational for several years, while the Keningau and Telupit plants have begun recently. These biogas projects are anticipated to further improve profitability, though the impact may not be substantial.

Expect 5% Increase in FFB Production Growth

Management projects a 5% increase in FFB production growth for FY25. Despite volatile CPO prices recently, the group remains hopeful that these prices will eventually stabilise in FY25, averaging at RM4,000/tonne. In the backdrop of rising cost environment, which have caused tremendous challenges to maintaining costefficiency, the group has implemented effective strategies to mitigate these impacts. The group has successfully established a new revenue streams from selling palm shells to 3rd parties. This additional income source, coupled with revenue generated from its solvent extraction plants, has helped counterbalance the increased expenses.

Expansion & Land Acquisition

The group is always looking to expand its land bank but faces challenges due to high land prices and ESG restrictions. Meanwhile, the group is also exploring coconut plantation, which is in the experimental stage, as a potential area for growth and earnings diversification. Besides, the group is also assessing the carbon credit market, particularly for its plantations. Carbon credits could provide an additional revenue stream as ESG considerations have become an important business practice globally, in our view.

Renewable Energy & Future Plans

The group has signed a Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB) to supply electricity from its biogas plants at fixed rates of approximately 46.9sen/kWh for the first two mills and 39sen for the third. Meanwhile, there is interest in exploring solar farm projects on its plantation land, but the feasibility remains uncertain, largely due to the remote locations of the group’s properties.

Valuation

We maintain our earnings forecast and TP of RM2.50/share, which is based on a CY25 PER of 16x. However, we downgrade our recommendation for KIML from Buy to HOLD as there is limited upside potentials at the current price level. The group is expected to release its 2QFY25 results by the end of this month.

Source: TA Research - 9 Sept 2024