Kim Loong Resources Bhd
(April 26, RM1.23)
Upgrade to buy with a higher target price (TP) of RM1.32. We concluded a teleconference call with Kim Loong Resources Bhd’s management team recently and foresee a slightly better outlook for the group in view of earnings boost from the sales of biomass-generated electricity.

We understand that the earnings generated from the sales of biomass-generated electricity to Sustainable Energy Development Authority (Seda) are expected to kick in in second half of financial year 2020 (2HFY20) which would improve the group’s earnings.

The group has carried out replanting of about 680ha in FY19. Looking forward, the group plans to replant 800ha to 100ha in FY20. Meanwhile, replanting activities will be continued for the next five to six years. We understand that the replanting cost incurred could be around RM12,000 to RM15,000 per ha before turning mature.

The group’s fresh fruit bunch (FFB) production in FY19 was 310,082 tonnes, down 8.9% year-on-year (y-o-y) given smaller mature area (13,900ha) and lower FFB yield/mature area of 22.31ha.

Meanwhile, the immature area for FY19 was 1,046ha. The group expects FFB production in FY20 to be flat as mature area to be more or less the same as FY19.

We understand that the group is looking for oil palm land to expand its FFB production capacity. In view of government’s initiative to curb rising oil palm land, the group is only able to acquire existing brownfield land, which is deemed expensive. As such, the group would be prudent and careful in making sound decisions.

We learnt that the group is still in the midst of getting a licence for its Sarawak palm oil mill. However, management is uncertain on the timeline.

Its three existing palm oil mills (in Kota Tinggi, Keningau and Telupid) have reached their maximum capacities. The group managed to produce 329,489 tonnes of crude palm oil (CPO) in FY19, which was equivalent to a CPO oil extraction rate of 21.78%. Looking forward, we expect FFB intake under milling operation in FY20 to be 1.5 million tonnes.

We understand that the group has secured two contracts with Seda to sell its renewable energy: 2mw for its Keningau mill and 1.8mw for its Kota Tinggi mill. The construction of power plants ongoing with expected completion timeline in 2HFY20. The group expects an earnings boost of RM8 million per annum to flow in after the completion of the construction.

Nevertheless, the total construction cost is about RM15 million. Besides that, we also learnt that the group is trying to obtain another 1.2mw renewable energy contract for its Telupid mill from Seda.

We tweak down our earnings forecast for FY20 by 3.6% but lift earnings forecast for FY21 by 6% after some housekeeping and including earnings from Seda.

Our FY20 earnings forecast is based on FFB production of 309,618 tonnes and 1.50 million tonnes intake under milling operation with a lower CPO average selling price of RM2,250 a tonne.

Major risks are: i) volatility in palm oil prices; ii) fluctuation in FFB production due to weather factors; iii) higher-than-expected increase in operating expenses due to shortage of foreign labour; and iv) lower-than expected Seda’s earnings.

Our TP is derived at 14.7 times price earnings ratio (PER) with FY22 earnings per share of nine sen. The ascribed PER is at +1 standard deviation above its three-year trailing PER given: 1) catalyst from renewable energy segment, 2) prudent management; and 3) decent dividend payment. — JF Apex Securities, April 26