Kim Loong Resources Bhd
(Sept 30, RM1.18)
Maintain hold with an unchanged target price (TP) of RM1: Kim Loong Resources Bhd reported a profit after tax and minority interest (Patmi) of RM10 million for the second quarter ended July 31, 2019 (2QFY20), which tumbled 28% quarter-on-quarter (q-o-q) and 13% year-on-year (y-o-y).

The lacklustre performance was mainly due to lower fresh fruit bunch (FFB) production and further compounded by softening crude palm oil (CPO) average selling prices (ASPs).

Six months (6M) of FY20 Patmi only met 37% and 33% of our and consensus full-year earnings estimates respectively.

Low production and weak CPO ASPs weighed on its plantation operations. Plantation operation earnings before interest and tax (Ebit) slid 34% q-o-q and 13% y-o-y to RM5.2 million in view of lower FFB production (-16% q-o-q; +8% y-o-y) and lower CPO ASPs (-3.5% q-o-q; -16% y-o-y). As such, 6MFY120 Ebit slumped 61% y-o-y to RM43 million amid flat FFB production (+1% y-o-y) and lower CPO ASPs (-17% y-o-y).

Similarly, its milling operations were fazed by lower CPO ASPs despite recording higher sales quantities.

The lower FFB production was mainly due to seasonal factors as FFB production of the company’s mature estates is normally low during the second quarter, rises in the third quarter, peaks in the fourth quarter and declines slowly in the first quarter. The management noted that the drop in FFB production (-15% q-o-q to 12,000 tonnes) was broadly in line with the FFB yield performance in Sabah.

Kim Loong declared an interim dividend of three sen per share. We expect another dividend of two sen per share to be declared for the second half of FY20. As such, total dividends for FY20 could end up at five sen per share, translating into a dividend yield of 4.4% based on its recent share price of RM1.14.

We slash our earnings forecasts for FY20 and FY21 by 17.5% and 15.7% respectively, taking into account lower FFB production and a soft CPO ASP outlook.

Our FY20 earnings forecast assumes FFB production of 294,558 tonnes and 1.55 million tonnes of intake under its milling operations with a CPO ASP of RM2,000.

Major risks include: i) volatility in palm oil prices; ii) fluctuations in FFB production due to weather factors; and iii) higher-than-expected increases in operating expenses due to a shortage of foreign labour in the plantation sector.

We maintain our “hold” call with an unchanged TP of RM1 (RM1.25 previously) after rolling over our valuations to FY21. Our TP is now pegged at 14.7 times forecast FY21 earnings per share. The price-earnings ratio (PER) assigned for valuations is at +1 standard deviation above its three-year trailing PER given its prudent management.

Overall, we envisage that the prevailing soft CPO prices will not improve in the short term due to high levels of stockpiles despite the upward trend in crude oil prices. Nevertheless, we opine that possible catalysts for the stock include the setup of a new milling plant in Sarawak and expansion of its plantable land. — JF Apex Securities Bhd, Sept 30