HIGHEST RETURNS TO SHAREHOLDERS OVER THREE YEARS: PLANTATION: Kim Loong Resources Bhd - The planter and miller scores three in a row

This article first appeared in The Edge Malaysia Weekly, on December 17, 2018 - December 23, 2018.
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Kim Loong Resources Bhd, a Johor-based oil palm grower and crude palm oil (CPO) miller, retained its position as the Billion Ringgit Club member with the highest returns to shareholders in the plantation sector for the third straight year.

Despite the prolonged downturn in the plantation sector, Kim Loong generally performed better than its peers on Bursa Malaysia. Its good dividend payouts likely helped.

In the evaluation period of June 30, 2015, to June 29, 2018, the stock rose 72%, reflecting a three-year compound average growth rate (CAGR) of 19.9% — the highest among plantation counters.

Its gross dividend yields have also been more attractive than returns on conventional bank deposits in the past five years, rising as high as 7.6% in its financial year ended Jan 31, 2016 (FY2016), as the company paid out 97% of its earnings.

According to Bloomberg data, Kim Loong declared a total dividend per share (DPS) of 24 sen (equivalent to eight sen per share post the three-for-one share split completed in April this year) for FY2018, giving shareholders a fairly attractive dividend yield of more than 5% at the time. The total payout represents about 75% of the annual profit attributable to the owners of the company.

Kim Loong is 63%-owned by the Gooi family, which also owns locally listed property developer Crescendo Corp Bhd. Kim Loong’s principal activities are divided into two main areas: plantation operations and milling operations. The company owns oil palm estates in Johor, Sabah and Sarawak.

As at end-FY2018, Kim Loong’s total plantation land bank stood at 15,946ha, of which 94% was fully planted with oil palm. About 86% of the palm trees were mature at over six years old, 9% were young mature at below six years old while the remaining 5% were at the immature stage. The company expects to replant about 1,200ha of the plantations in FY2019 and has been sourcing additional land in Johor, Pahang, Sabah and Sarawak. It says, however, that Roundtable on Sustainable Palm Oil (RSPO) restrictions “are a major constraint”.

“To support our plantation operation in Sarawak, we have been actively looking into the possibility of setting up a palm oil mill there,” says executive chairman Gooi Seong Lim in a May 17 note appended to Kim Loong’s 2018 annual report.

The planter expects fresh fruit bunch (FFB) production in FY2019 to fall 10% year on year mainly due to the replanting of old trees. Its milling operations saw a record-high processing quantity of 1.5 million tonnes of FFB in FY2018 and its management is “optimistic that its three mills can continue to maintain high utilisation rates” in FY2019.

“We are uncertain about the direction of the price of CPO in view of its susceptibility to fluctuations in currency exchange rate, demand and supply of commodities, import policies of major importing countries as well as the weather in major oilseed purchasing countries. Nevertheless, we hope that CPO prices stay above the RM2,400 per tonne level … We foresee the group performing satisfactorily in FY2019,” Gooi adds.

The company’s results for its second quarter ended July 31, 2018 (2QFY2019), however, came in below expectations due to weaker-than-expected milling margins and lower-than-expected production.

UOB Kay Hian Research, for one, expects its earnings to improve in the second half on the back of higher FFB production, which would lead to higher utilisation rates at its mills.

“We forecast FFB production to drop 9% year on year in FY2019 as per management guidance due to its replanting programme. Management is targeting to replant 800ha to 1,000ha (6% to 7% of mature areas) per year for the next five years. We forecast FFB production growth of -4% year on year in FY2020-FY2021. We have cut our FY2019 net profit estimate by 22% to factor in lower processing margins from the milling operations and maintained our FY2020-FY2021 net profit estimate,” the research house says in a Sept 28 note.

It forecasts Kim Loong’s net profit to come in at RM78 million in FY2019 before climbing to RM111 million in FY2020 and RM114 million in FY2021. “The improvement in FY2020 will come mainly from an increase in the milling operations’ utilisation rates and processing margins.”

Kim Loong’s net profit was RM98.8 million in FY2018, RM71.1 million in FY2017 and RM73.8 million in FY2016.

According to Bloomberg data, only two analysts covered the stock at the time of writing. JF Apex had a “hold” call on the stock and a target price of RM1.25 while UOB Kay Hian had a “buy” call with a target price of RM1.50, based on 13 times FY2020 earnings.

If the company has its way, the recent one-to-three share split that lowered the entry price for the stock may help increase retail participation.