This article first appeared in The Edge Financial Daily on July 31, 2017 - August 6, 2017

Kim Loong Resources Bhd
(July 28, RM4)
Initiate coverage with a target price (TP) of RM4.32: Our fair value for Kim Loong Resources Bhd renders a 10.6% upside to its current share price. Besides that, Kim Loong also rewards investors with a decent dividend yield of 3.9%.

Kim Loong is primarily involved in oil palm cultivation and palm oil milling activities. It is a fundamentally-sound company, enjoying a three-year compound annual growth rate (CAGR) of 8.7% for its top line during financial years 2014 to 2017 (FY14 to FY17), while maintaining a favourable net margin.

Kim Loong expects to achieve a year-on-year (y-o-y) fresh fruit bunch (FFB) production growth of 23.8% in FY18, backed by mature planted palm oil land of about 14,300ha and 21 tonnes-per-hectare FFB yield for the past seven years (including seasonal and cyclical low yield periods).

Total plantation land for Kim Loong stands at 15,364ha with palm oil estates located in Johor, Sabah and Sarawak.

Despite stiff competition from surrounding mills, Kim Loong targets to achieve an FFB intake of 1.2 million tonnes in FY18, slightly higher than 1.15 million tonnes achieved in FY17.

Kim Loong expects to have crude palm oil (CPO) and palm kernel production of 264,000 tonnes (+5.5% y-o-y) and 60,000 tonnes (+5.8% y-o-y) respectively in FY18, underpinned by an oil extraction rate (OER) of 22% and kernel extraction rate of 5%.

Kim Loong is currently managing three palm mills, with two located in Telupid and Keningau, Sabah, and one in Kota Tinggi, Johor. The mills have a total processing capacity of 1.5 million tonnes per annum.

Kim Loong obtained the Sustainable Energy Development Authority (Seda)’s approval to supply a power grid of 1.8MW for the Kota Tinggi mill and 2MW for the Keningau mill under its biogas project.

The company is also applying for another 2MW for the Telupid mill. This is in line with its effort to improve efficiency and generate additional income from waste in mills.  We understand that the excess electricity could be sold for about 40 sen per kilowatt and provide extra income to the company. Besides that, Kim Loong also sells its surplus of palm kernel shell to replace usage of fossil fuel.

Kim Loong has delivered a consistent net margin close to 10% for the past few years except in FY17 as it was affected by the El Nino. Still, it managed to record a reasonable net margin of 8%.

We understand that Kim Loong is in the midst of settling the remaining available Native Customary Rights (NCR) plantable land (475ha) under the oil palm estate in Sg Tenggang/Kranggas and to develop approximately 2,072ha of state land in Kranggas Pantu, Sri Aman Division, Sarawak.

Besides that, we also learnt that it is planning to set up a new oil mill in Sarawak, the licence for which is pending. Should the oil mill come on stream, it will provide synergy to Kim Loong as the group is able to source FFB intake from its Sarawak palm estate, thus generating more earnings for the group.

About 80% of palm oil is consumed in food form, while the rest is used in industrial and consumer products, such as cosmetics and biofuel.

Meanwhile, the comparatively low price of palm oil compared to other vegetable oils such as soybean oil, sunflower oil and rapeseed oil is expected to drive demand over the long term.

We estimate Kim Loong’s earnings to recover and grow by 11.9% y-o-y to RM79.6 million for FY18 and 2% y-o-y to RM81.2 million for FY19.

The growth in earnings is underpinned by recovery in FFB production from the dry spell and higher FFB intake for its milling segment. Our assumptions for CPO and palm kernel selling prices for FY18F/FY19F are RM2500/RM253.

The major risks are volatility in palm oil prices, fluctuation in FFB production due to weather factors and a higher-than-expected increase in operating expenses due to shortage of foreign labour in the plantation sector.

We initiate coverage of Kim Loong with a TP of RM4.32, based on 16.9 times 2018F price per earnings (PER). The PER assigned for valuation is at +2 standard deviation above its five-year historical average.

The PER assigned is also close to prevailing valuations of mid-cap plantation counters, which now trade at around 18 times.

Our TP renders a price appreciation of 10.6% based on its current share price of RM3.90, on top of the forecast dividend yield of 3.9%.

All in, investors shall expect a total return of 14.6%. We favour Kim Loong given its prudent management, judging from the consistent performance posted by the group for the past few years as well as generosity of management in rewarding shareholders.

Looking forward, we opine that the catalyst for the stock would be the setting up of the new milling plant in Sarawak and expansion of its plantable land. — JF Apex Securities, July 28