This article first appeared in The Edge Malaysia Weekly on August 29, 2022 - September 4, 2022

KIM Loong Resources Bhd may have recorded its highest profit of RM136.58 million for the financial year ended Jan 31, 2022 (FY2022), but the owners of the Johor-based planter are not about to let themselves get carried away.

Although Kim Loong has been riding the commodity boom and high crude palm oil (CPO) prices, its managing director and major shareholder Gooi Seong Heen warns that profound industry challenges persist.

He acknowledges that the labour shortage is beyond the group’s control, while there are not many expansion and growth opportunities out there.

“We rode the commodity boom. We delivered good results. We paid good dividends. We did everything we could. But, frankly, we, as the management of the company, do feel constrained,” Gooi tells The Edge in a virtual interview.

The 71-year-old was appointed as Kim Loong’s executive director in 1990 and redesignated to his current position in 2006.

“Our company is doing fairly well, but that’s all we can do at the moment. Kim Loong is a rather conservative company; we do not intend to jump into something that we are not familiar with,” he says.

For FY2022, Kim Loong recorded a fresh fruit bunch yield of 20.59 tonnes per hectare and an oil extraction rate of 21.04%. The national average for 2021 were 15.47 tonnes/ha and 20.01%.

Kim Loong owns estates in Johor, Sabah and Sarawak, with a total plantable area of over 16,000ha.

While Kim Loong has been on the lookout for expansion opportunities in Malaysia, good land bank is hard to come by. Nevertheless, Gooi says the group is reasonably happy and satisfied with what it has now.

“It would be good if we could increase our plantation acreage, perhaps by a few thousand hectares, within the next few years. But there are some industry issues that need to be resolved, especially the labour shortage,” he says. “And then, of course, there aren’t many people who are willing to sell. Even if they do, they would ask for a ridiculously high price, which we don’t think is worth the money, because we will never know whether CPO prices will be going down further.”

It’s been a roller-coaster ride for CPO prices over the past 12 months.

According to data from the Malaysia Palm Oil Board, the spot price for CPO had surged from RM4,564 per tonne on Aug 26 last year to hit an all-time high of RM8,076 per tonne on March 2 this year, before it came back down to the RM4,200 level last week.

“For the first time, CPO prices shot up to RM8,000 per tonne in March. We have never seen anything quite like this before and, frankly, we were unprepared for it. We took some profit at the wrong level, so we missed out on some of the profits,” Gooi admits.

He reveals that Kim Loong had locked in some of its sales between the RM4,000 and the RM5,000 level, which it thought were already very good prices.

“And then, the CPO prices went all the way to RM7,000 and even RM8,000. We continued to sell as CPO prices went up, but to be honest, we missed out quite a bit between the RM5,000 level and the RM7,000 level,” says Gooi.

Nevertheless, he did foresee prices coming off their peak because RM7,000 and RM8,000 were “really scary” levels.

“We knew all along that it was not sustainable and it would come down, it’s just a matter of time. Anyway, I don’t think we will ever see this [CPO prices hitting RM7,000-RM8,000] again for a long, long time. I think the new normal for CPO prices now should be around RM3,000 to RM4,000,” Gooi says.

Kim Loong saw its net profit jump 44% to RM136.58 million in FY2022, up from RM94.89 million a year ago. The group continued to generate earnings of RM39.22 million in the first quarter ended April 30, 2022 (1QFY2023).

Kim Loong has been known as a cash-rich plantation company that pays generous dividends. A check on AbsolutelyStocks shows that its net cash position stood at RM343.6 million as at April 30.

Given its growth constraints, Gooi concedes that Kim Loong is likely to remain a defensive stock that will continue to pay decent dividends. “In fact, our DPS [dividend per share] of 14 sen was at a historical high in FY2022. If we can beat our profit last year, we will continue to reward our shareholders by at least maintaining a DPS of 14 sen, or maybe even higher in FY2023.”

Over the past six months, Kim Loong’s share price has declined 19% to close at RM1.70 last Friday, giving it a market capitalisation of RM1.65 billion. The counter is currently trading at a historical price-earnings ratio of 11 times.

Gooi believes the share price correction could present an opportunity for yield-seeking investors. “At the current price, we are talking about a dividend yield of 8%. Of course, investors need to ask themselves, do they believe CPO prices will sustain at the RM4,000 level? If they do, perhaps now could be a good time to go in.

“But if you think CPO prices could revisit the RM2,000 level, then now is not the right time. After all, we are not in a recession-proof industry. If a recession comes, plantation companies like us will be affected.”

Still, Gooi anticipates that FY2023 will be a better year than FY2022, provided CPO prices sustain around the RM4,000 level.

“Obviously, CPO prices have come down a lot. But overall, we still expect to see profit growth in FY2023, and we are cautiously optimistic that we could achieve another record year,” he says.

Kim Loong has two major cost components. Fertiliser cost made up at least 30% of the group’s cost of production while labour cost made up another 30%.

“Going forward, we expect labour costs to go up further. Meanwhile, fertiliser cost has easily doubled in the past 12 months. Our manuring cost has gone up from RM1,100-RM1,200 per hectare to more than RM2,000 now, which is our budgeted cost for FY2023,” Gooi says.

He reiterates that the shortage of labour is a big problem for plantation companies like Kim Loong, which currently employs more than 2,000 plantation workers and harvesters, mostly from Indonesia.

“During the Covid-19 pandemic, some of them went home and never came back. So, we now still need to hire additional 10%-20% of workers. We might need to pay them more, so our labour cost might increase,” Gooi says.

Due to the labour shortage, Kim Loong also suffered 10%-20% crop losses, especially in its Sarawak estates.

“We encourage them to work harder and longer, and we are willing to pay them more. But there’s only so much we can do. All these mechanical methods have a lot of constraints,” says Gooi.

Kim Loong is 64.68% controlled by Sharikat Kim Loong Sdn Bhd, the private vehicle of the Gooi brothers.

The top 30 shareholders of Kim Loong include Koperasi Polis DiRaja Malaysia Bhd, Manulife Investment Progress Fund and Neoh Choo Ee & Company Sdn Bhd.

Gooi’s elder brother Seong Lim is executive chairman of Kim Loong, and his two younger brothers Seong Chneh and Seong Gum also sit on the board as executive directors.

It is worth noting that Seong Lim, who shares his fortune with his three younger brothers, is ranked by Forbes magazine as Malaysia’s 39th richest man, with a net worth of US$405 million (RM1.81 billion).

The Gooi family also controls Crescendo Corp Bhd, a Main Market-listed property and construction firm with a market capitalisation of close to RM300 million.

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