This article first appeared in The Edge Financial Daily on April 15, 2019 - April 21, 2019

KUALA LUMPUR: Looking at the production trends that indicate a low-yield cycle in the coming months, Kim Loong Resources Bhd is positive crude palm oil (CPO) prices will see an improvement in the current financial year.

Even though the prices are still under pressure because of high inventory levels and the recent decision by the European Union to ban the usage of palm oil as an additive for fuel in the future, managing director (MD) Gooi Seong Heen sees an impending upswing.

“The CPO price could move higher from the current level of RM2,000 per tonne considering that the production trends would be entering a low-yield cycle in the next few months. Crude petroleum oil price increases may lend additional support to [the] biodiesel price,” Gooi told The Edge Financial Daily in an email.

At last Friday’s close, the benchmark palm oil contract for June delivery was traded RM12 higher at RM2,162 a tonne.

For the financial year ended Jan 31, 2019 (FY19), Kim Loong’s net profit dropped 46% to RM52.12 million or 5.58 sen per share, from RM96.55 million or 10.34 sen per share for FY18.

Revenue fell by nearly a fifth to RM872.94 million from RM1.08 billion due to the significantly lower average CPO prices as well as fresh fruit bunch (FFB) production.

In FY20, fresh fruit bunch (FFB) production is expected to remain stable, which, coupled with a projection of higher milling utilisation capacity at its plants, leaves Gooi optimistic about another satisfactory performance in FY20, if not an improvement over FY19.

But he cautioned that this is subject to CPO prices and the operating environment in the remaining period of FY20.

FFB production in FY19 fell 9% year-on-year, while the FFB yield stood at 21.78 tonnes per hectare (ha) — a reasonably good performance in Gooi’s view given the company’s palm age profile.

“We expect to maintain a similar yield performance for FY20,” he said.

A CPO price of around RM2,500 per tonne is a comfortable level for the group and industry as a whole, he said.

However, he observed: “Based on the current market conditions and factors that are beyond our control, it may be difficult for Kim Loong to attain that level of CPO prices in FY20 unless the weather turns very dry later on.”

Kim Loong is principally involved in investment holding, cultivation of oil palms, processing of oil palm FFBs and marketing of oil palm products, processing of oil palm fibre and biogas and power generation.

As at Jan 31, 2019, the group’s total plantation land holding stood at some 15,800ha of which 95% were planted with oil palms. Out of the total planted area, approximately 86% are mature above six years old, 7% are young mature below six years old while the remaining 7% are at the immature stage. The plantations are located in Johor, Sabah and Sarawak.

As close to all of the group’s plantation areas have been planted, Gooi explained that the group has been actively looking for additional suitable plantation land in Sabah and Sarawak, preferably near their existing operations. However, there are certain restraints because the group is committed to Roundtable on Sustainable Palm Oil certification and avoiding peatland or high carbon stock areas.

Kim Loong has a continual replanting programme of approximately 1,000ha per year for old palms that run from 2019 to 2026.

Gooi said that the preparation to supply biogas power from its three mills to the national grid is ongoing and that the group currently generates power using biogas engines for internal use only at its mills.

“We are also taking steps to apply for approval for a two-megawatt (mw) quota from the Sustainable Energy Development Authority (SEDA) for our mill in Telupid, Sabah,” he said.

Kim Loong has secured SEDA’s approval to supply 1.8mw of power from its Kota Tinggi mill, and 2mw from its Keningau mill, to the national grid. The Kota Tinggi biogas plant has completed the installation and will start operations by the first half of the year, while the Keningau plant is expected to commence by year end.

With power generation from biogas, he said, the excess of the palm kernel shells can be sold to third parties and contribute to additional revenue and profit.

As at FY19, its plantation and palm oil mining segments contributed 13% and 87% respectively of its revenue.

Gooi acknowledged that power generation could be a future revenue contributor, but presently does not expect it to be as material compared to the main segments.