Kim Loong’s plantation and milling segments lift 1Q earnings

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Kim Loong Resources Bhd(June 27, RM2.98)Maintain hold with target price of RM3.20: Kim Loong’s first quarter ended April 30 of financial year 2015 (1QFY15) net profit doubled or grew 101% year-on-year (y-o-y) to RM28.4 million, on the back of stronger revenue of RM217 million (+58% y-o-y). This came above our expectations as the 1QFY15 net profit translated into 45% of our full-year estimate of RM62.6 million.

The better earnings were lifted by its plantation and milling segments, whose revenue increased by 39% and 58% y-o-y to RM42.7 million and RM210.2 million respectively.

The stronger 1QFY15 revenue is attributed to: (i) higher fresh fruit bunch (FFB) output at 77,900 tonnes (+5% y-o-y); (ii) stronger average FFB price (+32% y-o-y); and (iii) stronger average crude palm oil (CPO) price (+16% y-o-y; average spot CPO price for February 2014 to April 2014 at RM2,654 per tonne.

Meanwhile, profit was also lifted by better margins as the earnings before interest and taxes margin had improved to 21.1% (versus 1QFY14’s 17.7%). This was largely due to better processing margin and higher processing quantity in palm oil milling activities.

We increase FY15 and FY16 earnings per share (EPS) by 41% and 19% to 28.6 sen and 24.7 sen, following our 2014, 2015, 2016 CPO price forecast revision to RM2,790, RM2,680 and RM2,820 per tonne respectively.

With the impending occurance of the El Nino weather phenomenon, we think there could be potential upside to 2014’s CPO price but this could be offset by lower yield.

We maintain our “hold” recommendation with a higher target price of RM3.20 from RM2.61 pegged to 13 times FY16F EPS of 24.7 sen. We think valuation is fair as the stock is currently trading at 10 times to 12 times FY15 and FY16 earnings and at +0.5 standard deviation above forward price-earnings ratio mean.

Also, we think earnings growth could be limited by its plantation profile as Kim Loong is not likely to have any significant increase in new maturity areas in the near term. — AllianceDBS Research, June 27

This article first appeared in The Edge Financial Daily, on June 30, 2014.