Wednesday, 9 August 2017

Kim loong - An Efficient Planter (Malacca Securities)

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  • We initiate coverage on Kim Loong Resources Bhd (KLR) with a HOLD recommendation and a target price of RM 4.15. Although we like KLR for its standing as one of the leading mid-cap plantation companies in Malaysia with an established track record of approximately 40 years of operational experience, its valuation is already fair, in our view, after its share price has climbed steadily since the start of the year.
  • We also like the company’s proficient operational structure of having delivered a higher-than-average oil extraction rate (OER) vs. the industry average over the years. Approximately 84.0% of KLR’s trees are at the prime production age and offers strong fresh fruit bunches (FFB) production yield on the approximately 15,000 ha. of oil palm land that it has cultivated in Malaysia.
  • The group is currently expanding its plantation landbank, focusing on East Malaysia that will ensure longer term earnings growth and has started planting on 2,419 ha. of Native Customary Rights (NCR) land in Sarawak. Going forward, its earnings will also be augmented by the sale of electricity generated by its biogas plants.
  • We expect KLR to register a double digit three-year net profit CAGR of 15.0% to reach RM94.1 mln in FY19, while revenue is expected to grow 3.9% to RM962.8 mln over the same period. We arrive at our target price by ascribing a target PER of 14.0x to its forecast FY18 EPS of 29.6 sen. The assigned PER is within its’ peers’ PERs of 13.0x-15.0x. We also expect KLR to continue rewarding its shareholders with decent dividend yields of between 5.7%-5.9% over the next two years.


We like KLR for its established track record as one of the more reputable plantation companies in Malaysia, having been operational over the past 40 years. Over the years, the group has also gradually positioned itself as a sizeable mid-cap plantation company in Malaysia, owning approximately 15,000 ha. of oil palm land.
KLR has been reaping higher oil extraction rate (OER) vs. the industry average over the years, showcasing the group’s competitiveness and competency in maintaining its FFB processing efficiency and quality through an integrated milling operation, coupled with reduction of wastages through the conversion of waste to increase the extraction of residual oil from pressed fibre.
We are also positive on KLR’s expansion plans in the Sarawak region. The group is in the midst of obtaining the acceptance from Native Customary Rights (NCR) owners for the remaining land. With the completion of the aforementioned acquisition, KLR will own approximately 23,500 ha. of plantation land across Malaysia.
The group’s operations are also overseen by an experienced management team with over 40 years of experience in the oil palm industry (refer to Appendix 1 for full profile of its Board of Directors), thereby ensuring sustainable top-of-the-range operational statistics and OERs going forward.
At current price of RM4.00, however, we think that its share price upsides are limited given that KLR valuation is already fair, trading at prospective FY18 and FY19 PERs of 13.1x and 12.9x, which are close to its peers average of 13.3x and 15.1x respectively. Nonetheless, we are positive on KLR growth prospects, backed by its established track record, coupled with its position as one of the leading plantation companies in Malaysia with higher operational efficiency vs. its peers.
At the target price of RM4.15, KLR will trade an implied PER of 13.5x and 13.3x for FY18 and FY19 respectively, which is slightly below of its peers, but close to fair, in our opinion, given the cyclical nature of the crude palm oil industry.

Investment Risk

Risks to our recommendation include fluctuations in the CPO prices. The volatility of CPO prices is subjected to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia).
The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.
A firmer Ringgit against the U.S. Dollar could impact the group’s bottom line. A recovery in the local currency against the Greenback will negatively impact on the group’s earnings and vice versa, as the majority of the country’s CPO output are exported.
The plantation sector in Malaysia relies heavily on foreign workers. Foreign workers in the plantation sector’s job scope typically include harvesting, field works and other adhoc works. A worst-than-expected labour shortage, particularly in East Malaysia, could hamper harvesting and the corresponding production efficiency.
Source: Mplus Research - 9 Aug 2017

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