This article first appeared in The Edge Financial Daily on October 1, 2018

Kim Loong Resources Bhd
(Sept 28, RM1.32)
Downgrade to hold with a lower target price (TP) of RM1.25: Kim Loong Resources Bhd reported a profit after tax and minority interest (Patmi) of RM12 million for the second quarter of financial year 2019 (2QFY19), which tumbled 40.3% quarter-on-quarter (q-o-q) and 56.4% year-on-year (y-o-y).

The lacklustre performance was mainly due to lower fresh fruit bunch (FFB) production, further compounded by softening crude palm oil (CPO) average selling prices (ASPs).

Cumulative six months of FY19’s (6MFY19) Patmi only met 33.4% and 32.6% of our and consensus full-year earnings estimates respectively.

Plantation operation earnings before interest and tax (Ebit) slid 66.5% q-o-q and 77% y-o-y to RM6 million in view of lower FFB production (-25.8% q-o-q; -26% y-o-y) and a lower CPO ASP (-4.9% q-o-q; -15% y-o-y). As such, 6MFY19’s Ebit slumped 60.5% y-o-y to RM23.8 million, again, no thanks to lower FFB production (-16.1% y-o-y) and the same for the CPO ASP (-17% y-o-y).

Cumulatively, Ebit was recorded at RM20.8 million, which was marginally up by 4% given a low base in 6MFY18 (bogged down by its 1QFY18 performance).

The lower FFB production was mainly due to replanting programmes (it completed replanting for 300ha during 6MFY19) for old palm areas. Nevertheless, the group expects to see an increasing yield from young mature areas, which may mitigate the adverse impact. Meanwhile, FFB intake under milling operations is expected to be resilient at 1.5 million tonnes as the group continues to maintain high utilisation rates.

We expect another dividend of two sen per share to be declared for the second half of FY19. As such, the total dividend for FY19 could end up at five sen per share, which translates into a dividend yield of 3.9% based on the recent share price of RM1.31.

We have slashed our earnings forecasts for FY19 and FY20 by 30% and 21% respectively after taking into account lower FFB production guidance, coupled with a soft CPO ASP outlook.

Our FY20 earnings forecast is based on FFB production of 318,283 tonnes and 1.55 million tonnes of intake under the milling operations with an average CPO selling price of RM2,400.

Major risks are: i) volatility in palm oil prices; ii) fluctuation in FFB production due to weather factors; and iii) higher-than-expected increases in operating expenses due to a shortage of foreign labour in the plantation sector.

We have downgraded our “buy” call to “hold” with a lower TP of RM1.25 (from RM1.52) after rolling over our valuation to FY20 forecast (F) with lower earnings. Our TP is now pegged at 14.7 times FY20F earnings per share. The price-earnings ratio (PER) assigned for valuation is at +1 standard deviation above its three-year trailing PER given its prudent management.

Overall, we envisage that the prevailing soft CPO prices will not improve in the short term given the high levels of stockpiles despite the upward trend of crude oil prices. Nevertheless, we opine that possible catalysts for the stock include the set-up of a new milling plant in Sarawak and expansion of its plantable land. — JF Apex Securities, Sept 28