Kim Loong’s long term prospects solid from Sarawak expansion
KUCHING: Kim Loong Resources Bhd’s ( Kim Loong) long term prospects remain solid from its plans to expand in Sarawak and as such, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) recommends investors to take profit on the company.
In a report, it pointed out that Kim Loong intends to continue its expansion phase in Sarawak via its 70-30 joint venture with state government agency Pelita.
“We understand that management is also ‘actively looking into the possibility of setting up a palm oil mill in Sarawak’.
“We continue to be positive on further development in Sarawak, as its existing young acreage should contribute positively to fresh fruit bunches (FFB) growth over the long run,” it opined.
Furthermore, the research team pointed out that although Kim Loong’s FFB production suffered the drought effects of 2015 in 2017, along with other plantation players, the company is gradually recovering from the impact of the drought.
“In line with the sector, Kim Loong FFB production suffered the drought effects of 2015, with FY17A FFB production falling 16 per cent to 251,900 metric tonnes (MT).
“This was offset by stronger crude palm oil (CPO) prices at a full-year average of RM2,680 per MT (an increase of 25 per cent yearon-year) which led to a 34 per cent revenue jump to RM1.01 billion.
“However, weaker production led to higher cost per MT and dampened net margins to seven per cent, the lowest level in the last five years. As a result, net profit slipped slightly (three per cent) to RM71.3 million,” it explained.
Nevertheless, Kenanga Research pointed out, “With the drought effect lowering FFB yields from an average of 22 MT per hectare (ha) to 18 MT per ha in FY17A, we lower our FY18E yield estimate from 22 MT per ha to 19 MT per ha reflecting gradual recovery.
“Hence, we estimate FFB production to improve by 13 to eight per cent in FY18 to FY19E, slightly above the sector average growth of eight per cent.”
It noted that its FY18E forecast is on the conservative side against Kim Loong’s expected 20 per cent growth.
“As higher production leads to lower cost per MT, margins should normalise towards the historical nine per cent. However, with a lower yield estimate, our FY18E earnings forecast is trimmed by eight per cent to RM78 million,” it added.
It lowered its FY18E core net profit (CNP) of Kim Loong by eight per cent as it is more conservative on yield prospects reflecting gradual recovery from 2015 droughts.
It also forecast the company to record RM79 million in FY19, driven by FFB growth of eight per cent, in line with the sector’s outlook.