This article first appeared in The Edge Financial Daily on April 23, 2018

KUALA LUMPUR: After a fruitful financial year ended Jan 31, 2018 (FY18), Kim Loong Resources Bhd’s current financial year is looking less than rosy for the palm oil producer, according to managing director Gooi Seong Heen.

In FY18, the plantation company saw its revenue hit the billion ringgit mark for the first time since its inception, rising 20.5% to RM1.08 billion, from RM892.59 million the year before. Net profit for the year surged 39.3% to RM99.06 million, compared with RM71.12 million in FY17.

Kim Loong attributed the better financial performance to favourable palm oil prices, higher fresh fruit bunch (FFB) production — mainly contributed by estates in the Keningau region in Sabah after the El Nino phenomenon — as well as improved quantity and margins at its mills.

“We’d say we are not as optimistic this year. [Crude palm oil (CPO)] prices have been under pressure for the past few months, and there seems to be no signs of rebound anytime soon. If everything stays where it is now, then we are expecting lower profit,” Gooi, 67, told The Edge Financial Daily in a recent telephone interview.

Gooi said a comfortable CPO price for Kim Loong would be around RM2,700 a tonne — a level he said could be unattainable this year as prices are expected to average between RM2,400 and RM2,500. Last Friday, the benchmark palm oil third-month contract closed RM10 higher at RM2,414 per tonne.

The group is also estimating a drop of about 10% in FFB yield from last year, mostly due to a high-base effect offset by rising yield from young mature areas.

“Our yield was very high last year (up 35% to 23.88 tonne per hectare), and the entire plantation industry here too did very well. So even if it normalises this year, profit should still stay quite healthy, depending on the price, currency, and weather factors,” Gooi said.

As at Jan 31, the group had total plantation holdings measuring some 15,000ha spread across Johor, Sabah, and Sarawak. This excludes the 2,000ha of land in Pantu, Sarawak that it acquired together with joint venture partner Pelita Holdings Sdn Bhd. Planting has yet to start due to issues related to native customary rights (NCR) there.

Over the long term, one of Kim Loong’s concerns is the scarcity of land, limiting its growth prospects. Gooi said the group is eager to expand, but its cash reserves totalling RM300 million are currently sitting idly in the coffers with no suitable parcels of land in sight. The group also had a negligible gearing level of 0.05 times as at end-FY17.

“We have all this cash, but we don’t know what to do with it. We will keep looking in Sarawak and when the right one comes along, we will buy it,” he said, adding that the group is not keen to expand outside of Malaysia.

He explained the search continues as it is committed to the Roundtable on Sustainable Palm Oil certification and avoiding peatland or high carbon stock areas.

Kim Loong has been consistently paying out dividends to shareholders, with its payout ratio reaching up to 95.8% of its earnings in FY16.

For FY18, dividend per share was eight sen, giving the counter a yield of 5.88% based on its closing price of RM1.36 last Friday.

It also recently completed a one-to-three share split and bonus issue of 46.6 million free warrants on the basis of one for every 20 subdivided shares.

Meanwhile, the group will replant progressively within this year and next, about 6% of its oil palm trees. As at end-January, more than half (52%) of them were old mature palm, 28% were in prime mature stage, 9% were young mature, and 5% were immature.

Besides oil palm cultivation, Kim Loong manages three palm mills — one in Kota Tinggi, Johor, and two others in Keningau and Telupid in Sabah — and is now working to add a fourth mill to its portfolio.

“We are still working on getting a mill licence in Pantu, which could then give us quite a significant boost in capacity. That would take another two years down the road, it takes that long to build a mill,” said Gooi.

The Pantu mill is expected to add another 60 tonnes per hour worth of capacity when it comes on stream, he said. Its three operating mills are now running at a nearly full utilisation rate of 80%-90%, with an output of 1.5 million tonnes or at the rate of 250 tonnes per hour.

However, Gooi confessed that while the group’s milling operation is an area of growth, it is not as lucrative a business given the high cost of sales.

“We only earn a gross margin of about RM50 to RM60 per tonne of FFB processed, compared with a 40%-50% gross margin over at our plantation segment. This is why we are also looking into planting up the 2,000ha of land we have in Sarawak,” he added.

Additionally, Gooi updated that the supply of biogas power from its mills to the national grid is ongoing but lagging behind schedule.

“The Kota Tinggi plant connecting to the 11kV grid is almost ready. We have some minor snags, but hopefully that will be cleared by year end and up and running then. Tenaga Nasional Bhd will be paying us a little over 46 sen [per kilowatt hour].”

As for its Keningau plant, Gooi said the renewable energy purchase agreement has been signed. Construction works are expected to start in second half of this year, and operations to be commenced by end-2019.

Shares in Kim Loong closed two sen or 1.45% lower at RM1.36 last Friday, on volume of 134,000 shares, giving the group a market capitalisation of RM1.27 billion.

Over the past year, the stock has risen 15.44%.