DESPITE the soft crude palm oil (CPO) prices, Kim Loong Resources Bhd has managed to do well, maintaining earnings growth on improved yields and higher production.

“Our group performed well in the financial year ended Jan 31, 2015 (FY2015), mainly benefiting from higher fresh fruit bunch (FFB) production as well as CPO production,” its managing director Gooi Seong Heen tells The Edge.

The company is due to release its fourth-quarter financial results by the end of this month. In its third quarter ended Oct 31, 2014 (3QFY2015), Kim Loong’s FFB production grew 12% year on year (y-o-y) to 77,600 tonnes. Year-to-date (YTD) production was 227,400 tonnes, 13% higher than in the previous year. Total CPO production also grew 15% y-o-y to 70,100 tonnes and 27% YTD to 198,100 tonnes.

Kim Loong’s (fundamental: 2.8; valuation: 2.4) net profit leapt 49.4% y-o-y to RM61.6 million for the nine months ended Oct 31, 2014, on the back of a 34% increase in revenue to RM593.7 million.  

“We expect there will be marginal improvements in FFB and CPO production for FY2016, based on our current landbank and milling capacity,” says Gooi.

“The average CPO price achieved in the last quarter was about RM2,200 per tonne,” he says. This was 9% lower y-o-y but was still 4% higher YTD against the weak price environment.

In contrast, this outstrips the average selling prices (ASP) of larger plantation counters like Kuala Lumpur Kepong Bhd and IOI Corp Bhd, which recorded ASPs of RM2,138 and RM2,187 respectively.

CPO prices tumbled as much as 33% last year to RM1,929 per tonne at end-August from RM2,885 in March, bringing the 2014 average to about RM2,400. It has since retraced to just above RM2,200 last Thursday.

“We think CPO prices in calendar year 2015 could be moving within the range of RM2,100 to RM2,400 and could be no significantly different compared to the average price in calendar year 2014,” Gooi says.

Insider Asia has a “recommend” on Kim Loong, touting its above-average plantation yields, cash-rich balance sheet and high dividend yields. “Despite the volatile palm oil prices, its pre-tax profit has been relatively stable, ranging from RM79.5 million to RM95.4 million over the last five years, except for a surge to RM165 million in FY2012. Revenue hovered between RM451.5 million and RM768.3 million in the same period,” Insider Asia wrote in a report last December.

For FY2012, Kim Loong attributed the meteoric rise in its earnings to higher production and selling prices of CPO and palm kernel oil. FFB production grew 38% to 313,035 tonnes.

On top of that, FFB yield per hectare came to 23.8%, a drastic improvement from 17.4% in FY2011, when its estate in Keningau, Sabah, produced exceptionally low yields. The national average in 2012 was 18.9%. Currently, Kim Loong’s FFB yield stands at 22.07%.

The company has also made improvements to its oil extraction rate, increasing it to an average of 22.39% for FY2015 compared with 22.19% in FY2014 and 21.81% in FY2012.

“With higher CPO production and better margins, we expect the contribution from milling operations to improve to about 50% of the group’s profit as compared with 43% last year,” says Gooi.

For FY2014, profit from the milling operations came to RM40.6 million, while the plantations segment raked in RM54.1 million.

The company has been slowly balancing out the earnings contribution from each segment over the last few years. In FY2012, the plantations segment made up nearly 79% of group earnings (see table).

Kim Loong has three FFB mills — one in Kota Tinggi, Johor, and two in Sabah. It has a total milling capacity of 205 tonnes per hour; the Kota Tinggi mill has the largest capacity of 100 tonnes per hour.

The company processes its own FFB production at the two mills in Sabah but the Kota Tinggi plant mostly sources inputs externally.

It has had a stroke of good luck — the present low-price climate means cheaper feedstock for its mills. In contrast, diversified players with refineries are facing a margin squeeze because their outputs do not command much by way of selling prices.

Going forward, Gooi says the company will continue to look for new landbank. It currently operates a total 15,928ha in Johor, Sabah and Sarawak. He declines to give more details.

Almost 1,000ha have been pegged for planting this year. The company plans to replant old palms in 400ha, while the remaining land is for new plantings.

But this won’t make a significant change to the group’s palm age profile, says Gooi. “Our group’s current palm age profile is 13% below five years old, 21% between five and 10 years old, and 66% above 10 years old.” Going forward, growth will come from the development of 1,700ha it had secured in Sarawak in 2013.

“We estimate the cost of planting, inclusive of field maintenance costs, up to maturity will be in the range of RM10,000 to RM12,000 per hectare,” he explains. Roughly, this will mean that the group will spend RM10 million to RM12 million on planting.

Cash-rich Kim Loong has been generous in its dividend payments, giving out no less than 10 sen per share in the past five years. As at Oct 30, 2014, the company’s cash amounted to RM269.4 million. Accounting for borrowings and payables, net cash stood at RM168.4 million, or 54.3 sen per share.

It declared a 13 sen dividend per share in FY2014, translating into a 4.5% yield, according to The Edge Research. So far, Kim Loong has declared dividend per share of seven sen for FY2015.

Kim Loong’s shares closed at RM2.76 last Wednesday, trading at 10.5 times price-earnings ratio compared with over 20 times of other mid-cap planters.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company's financial dashboard.)

This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.

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