Kim Loong milling higher yields

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This article first appeared in The Edge Financial Daily, on April 4, 2016.


Kim-Loong_Table_FD_4apr16_theedgemarketsKim Loong Resources Bhd
(April 1, RM3.59)
Initiate buy with a target price of RM4.20:
Kim Loong Resources Bhd (KIML) is a small but efficient plantation company with total planted areas of 15,362ha in Johor, Sabah and Sarawak.

KIML has two key earnings streams from its plantation and milling operations. It stands out from other upstream players as it focuses on its milling operation.

About 70% of its fresh fruit bunch (FFB) needs are fulfilled by third parties. It also focuses on managing milling waste and by-products, and turning them into income-generating products.  

KIML is an efficient milling operator with one of the highest oil extraction rates of 22.3% for financial year 2016 (FY16) versus an industry average of 20.6% in Malaysia.

It generates higher income than its peers as its milling operation does not only focus on producing crude palm oil (CPO) and palm kernel oil, but also takes the milling operation to the next level.

Management maximises mill utilisation and value by developing value-added by-products as this will provide additional profit to the group and reduce disposal costs.  

We forecast an average FFB production growth of 2% for the next two to three years. In contrast, peers such as TH Plantations Bhd and IJM Plantations Bhd may post negative production growth.

For 2016, we are targeting an average CPO selling price of RM2,500 per tonne (+16% year-on-year).

This is positive for KIML, given its ability to deliver positive FFB production growth. For every 10% increase in CPO prices from our base case, our earnings per share forecasts would increase 17%.

KIML’s dividend yield has averaged 6.5% in the past five years with a dividend payout ratio in the range of 51% to 69%. This is supported by a strong balance position and low capital expenditure.

KIML is sitting on a net cash of 60.8 sen per share as at end-January 2016. Assuming a payout ratio of 55%, we are projecting dividends of 15 sen, 17.7 sen and 18.2 sen respectively for FY17 to FY19, translating into dividend yields of 4.2%, 4.9% and 5.1% respectively.  

Overall, we expect a potential total return of 21.2% from the current price level (upside of 17% and dividend yield of 4.2%).

Meanwhile, we expect a net profit compound annual growth rate of 12% to RM84 million, RM99 million and RM103 million for FY17, FY18 and FY19 respectively. — UOB Kay Hian, April 1