Kim Loong’s milling operations to the rescue

  • Gooi: Every player’s OER has gone down quite significantly, but we are still among the top mill operators. Our milling operation continues to make us less price-sensitive than our competitors.

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This article first appeared in Corporate, The Edge Malaysia Weekly, on June 20 - 26, 2016.

KIM Loong Resources Bhd’s efficiency has enabled it to stand out from among the country’s smaller crude palm oil (CPO) millers and growers. Unlike its peers, the Johor-based planter’s milling operations continue to generate strong earnings, even as CPO and fresh fruit bunches (FFB) fetched lower prices.

In fact, when the average CPO prices fell 9% year on year to RM2,150 a tonne, profit from Kim Loong’s milling operations rose 10% to RM57.26 million for the fiscal year ended Jan 31, 2016 (FY2016), as processing quantity and margins increased.

However, that might not be sufficient to cushion the tough patch ahead, given stiffer competition for the milling business coupled with a drastic decrease in the oil extraction rate (OER) and shortage of crops, mainly due to the hot and dry weather caused by El Niño.

The uneven ripening of FFB in recent months will further impact the OER, which is one of the measures plantation analysts track for efficiency.

“The ripening [of FFB] is not even. They look okay from the outside, but when you open them up, it’s all yellow in colour and there is no oil. This is quite unusual because the fruits are supposed to be orange in colour. It’s one of those things we can’t explain,” Kim Loong managing director Gooi Seong Heen tells The Edge.

He says the company’s palm oil mill in Kota Tinggi, Johor, which is capable of processing 100 tonnes of  FFB per hour, is the most seriously affected.

“It is suspected that after a long period of drought, sudden rain will cause the fruits to ripen even before full maturity. So far, there has been no official explanation from the Malaysian Palm Oil Board but this phenomenon has been observed nationwide,” he adds.

“We didn’t see that much [uneven ripening] last year. Normally, it only lasts for one month, and then goes back to normal. But now, the situation has persisted for two to three months.”

Kim Loong operates two other mills — in Keningau and Telupid in Sabah — with an FFB processing capacity of 90 tonnes and 60 tonnes per hour, respectively. The three mills can jointly process 1.8 million tonnes of FFB annually, but are only running at 80% to 90% capacity.

Given the abnormal ripening of FFB, leading to lower OER, Gooi expects the profit margin and earnings contribution from the downstream business to decline in FY2017.

In FY2016, the milling business accounted for more than 50% of profit, but it is now expected to drop to 40% in FY2017, mainly due to the better profitability of the plantation business.

“This year, our milling operation is not going to do as well. Our OER dropped to 21% in the first five months of FY2017, compared with 22.28% in FY2016,” says Gooi.

He, however, stresses that Kim Loong is still “better in many ways” than other plantation companies because its OER remains above the industry average (see bar chart).

More importantly, the company is still generating substantial income from its milling operation, mitigating the impact of the lower CPO price on its plantation business.

“Every player’s OER has gone down quite significantly, but we are still among the top mill operators. Our milling operation continues to make us less price-sensitive than our competitors,” Gooi says.

In FY2016, Kim Loong saw revenue and profit fall 2% to RM757.73 million and RM73.78 million respectively. The weaker performance was attributed to the lower FFB production and average selling price of CPO , as well as a reduction in OER.

Gooi expects FY2017 to be a flat year. While the plantation business will do better due to higher CPO prices, that will be offset by the weaker performance of the milling division.

“The CPO price is already at RM2,600 per tonne, and I don’t know whether it will go up further. Already, some leading market analysts are scaling down [forecasts],” he says.

He adds that the outlook for prices will also depend on whether or the US — which produces competing oilseeds like corn and soybean — will be affected by the weather in August that would cause crop stress.

“If La Niña comes, we are looking at RM3,000 per tonne. If not, maybe it will maintain at around RM2,600 per tonne or go even lower,” he says.

For the first five months of FY2017, Kim Loong’s average selling price for CPO was about RM2,500 per tonne, higher than the RM2,139 per tonne in FY2016, and above that of the previous two financial years but below the RM2,723 a tonne recorded in FY2013.

Kim Loong owns oil palm estates in Johor, Sabah and Sarawak with a total plantable area of over 15,900ha, 94% of which have been fully planted. Its plantations produced 299,455 tonnes of FFB in FY2016, translating into a FFB yield per mature ha of 21.56 tonnes.

Its internal target is to achieve total FFB production of 310,000 tonnes in FY2017, with a FFB yield per mature ha of 21 tonnes to 22 tonnes.

At the moment, says Gooi, there is no immediate plan to expand its plantation landbank as the company is still mulling over how to develop 2,000ha of native customary rights (NCR) land in Sarawak.

“There is not much progress on the NCR land. Basically, we cannot move because all the squatters are in there. We expect the land issue to take another year to resolve,” he says.

Kim Loong replanted about 500ha of its oil palm plantation in FY2017 and expects to replant another 2,000ha over the next three years.

On its share price performance, Gooi says now that Kim Loong’s market capitalisation has hit RM1 billion, he hopes it will attract more interest from institutional funds.

“I think our limitation is share liquidity, while our growth prospects are not so bright. If you ask me, I think we have already done most of the things that need to be done,” he says.

Kim Loong is trading at a price-earnings ratio (PER) of 14 times, after gaining 12% year to date, to close at RM3.41 last Thursday.

Interestingly, Kenanga Research recently noted Kim Loong’s net cash position, “growth prospect, solid balance sheet and consistent growth” and recommended a “trading buy” with a fair value of RM3.66, saying that valuations are undemanding compared with small-cap plantation peers. 

“Our shares are undervalued now. We don’t know why we are not trading at a PER of 20 times, despite our strong profitability,” says Gooi. “Next, we hope our share price can reach RM4, but it is only a hope.”