kim loong resources · kiml’s palm oil estates which are largely located in keningau, sabah have...

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(Member of Alliance Bank group) PP7766/03/2013 (032116)

7 August 2012

Small cap dividend play We initiate coverage on Kim Loong with a Neutral recommendation and a TP of RM2.65. We forecast a CPO ASP of RM3,200/mt for FY13 which is higher than FY12. However, earnings accretion from higher CPO ASP will be offset by poor production this year which is already down 36% y-o-y for 5MFY13. With only a small amount of immature hectarage, longer term growth also lacks excitement. That said, the group does offer a fairly attractive net dividend yield of 6.0% which will support share price at current levels. Small but successful palm oil planter and miller Kim Loong Resources (KIML) has a total plantation hectarage of 15,192ha (80% in Sabah,

the rest in Johor and Sarawak) of which 92% is planted with palm oil and the remainder with cocoa. From the total palm oil planted area, 91% (12,740ha) is mature while the remaining 9% (1,203ha) is immature.

KIML’s palm oil estates which are largely located in Keningau, Sabah have performed above industry average in terms of FFB yields and also OER. In FY12, the group’s mature FFB yield of 23.8mt/ha was above the MPOB Sabah average of 22mt/ha, and their overall OER of 21.81% was above the total industry average of 20.37%.

They have a nutraceuticals plant which may begin commercial production soon and they also have biogas and bio-fertiliser operations to complement their milling activities.

But FY13 will be a tough year due to poor production KIML’s FFB production for the 5MFY13 period is down 36.1% y-o-y while CPO production

is also down 23.6% y-o-y. KIML’s decline in production has been more severe than the industry over the same period largely because of replanting activities and also tree stress after FY12’s bumper crop.

Given the poor production YTD, we view that earnings of the group are going to be y-o-y lower. Already, 1Q13 net profits have come in lower by 12.6% y-o-y.

We are forecasting for a 11% decline in net profits in FY13 and flat earnings going into FY14. Our FY13 numbers impute a CPO ASP of RM3,200/mt (up from an estimated RM3,120/mt in FY12) and a decline in FFB matured yield to 21mt/ha. As for FY14, we forecast flat earnings y-o-y as we have imputed a decline in CPO ASP to RM3,100/mt but an increase of 1mt/ha in FFB yield.

Longer term growth limited unless there is M&A As was reported in the media recently, KIML is looking to commercialise their

nutraceuticals plant under the brand E-Life Gold once approvals from the Ministry of Health are obtained. We view that it could make for a small earnings surprise in FY13 or FY14.

KIML is also looking into electricity generation and sales to the national grid via their biomass operations. However, there is no timeline for this project just yet.

Ultimately, expansion in their plantation operations would be the most conducive for long term growth. The group currently has some 3,642ha of plantable land under the Native Customary Rights scheme in Sarawak which may be freed up for planting eventually. Otherwise, the group will have to secure growth from acquisitions.

Valuation and recommendation We initiate coverage on Kim Loong Resources with a NEUTRAL recommendation. We

value the company at their long term average P/E multiple of 9.6x. Pegging this to FY13 EPS of 27.7sen derives our target price of RM2.65/share.

Key risks to our estimates are unexpected extreme volatility in CPO prices and also an unprecedented decline in production due to weather effects or labour shortages. We calculate that every RM200/mt increase in CPO ASP will raise our net profit estimates by 10.6% and a 1mt/ha decline in FFB production will reduce earnings by 4.3%.

Kim Loong Resources Neutral Plantation Bloomberg Ticker: KIML MK | Bursa Code: 5027

Initiating Coverage

Analyst Team Coverage [email protected] +603 2722 1565 12-month upside potential Target price 2.65 Current price (as at 6 August) 2.55 Capital upside (%) 3.9 Net dividends (%) 6.0 Total return (%) 9.9 Key stock information Syariah-compliant? Yes Market cap (RM m) 783 Issued shares (m) 307 Free float (%) 33 52-week high / low (RM) 2.62 / 1.78 3-mth avg volume (‘000) 115 3-mth avg turnover (RM m) 0.3 Share price performance 1M 3M 6M Absolute (%) 4.3 1.9 5.5 Relative (%) 2.7 -1.5 -0.9 Share price chart

Major shareholders % Sharikat Kim Loong Sdn Bhd 63.8

Initiating Coverage | Kim Loong Resources | 7 August 2012

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SNAPSHOT OF FINANCIAL AND VALUATION METRICS

Figure 1 : Key financial data

FYE 31 Jan FY11 FY12 FY13F FY14F FY15F Revenue (RM m) 563.4 768.3 649.7 686.1 673.1 EBITDA (RM m) 112.2 190.7 166.9 167.7 159.1 EBIT (RM m) 90.2 166.9 147.6 147.7 138.3 Pretax profit (RM m) 90.6 165.0 142.9 143.1 133.8 Reported net profit (RM m) 58.3 96.0 85.7 85.9 80.3 Core net profit (RM m) 58.3 96.0 85.7 85.9 80.3 EPS (sen) 19.1 31.4 27.9 27.9 26.1 Core EPS (sen) 19.0 31.1 27.7 27.7 25.8 Alliance / Consensus (%) 88.6 94.5 83.9 Core EPS growth (%) 20.1 63.4 (11.0) (0.0) (6.5) P/E (x) 13.4 8.2 9.2 9.2 9.9 EV/EBITDA (x) 7.1 3.9 4.4 4.1 4.1 ROE (%) 13.1 18.9 16.2 15.1 13.3 Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash Net DPS (sen) 11.0 13.0 15.3 15.4 14.4 Net dividend yield (%) 4.3 5.1 6.0 6.0 5.6 BV/share (RM) 4.00 1.65 1.72 1.84 1.96 P/B (x) 1.8 1.5 1.5 1.4 1.3 Source: Alliance Research, Bloomberg

Figure 2 : Forward P/E trend Figure 3 : Forward P/B trend

Source: Alliance Research, Bloomberg Source: Alliance Research, Bloomberg

Figure 4 : Peer comparison

Company Call

Target price (RM)

Share price (RM)

Mkt Cap (RM m)

EPS Growth (%) P/E (x) P/BV (x) ROE (%) Net Dividend

Yield (%) CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13

Sime Darby Buy 11.71 9.81 58,952.8 7.7 5.8 13.5 12.8 2.2 2.0 16.4 15.7 3.2 3.2 IOI Corporation Neutral 5.12 5.13 32,977.9 4.7 -1.2 16.2 16.4 2.5 2.4 15.3 14.1 3.3 3.3 KL Kepong Trading buy 25.80 23.70 25,299.9 1.7 6.2 18.9 17.8 3.4 3.2 17.3 17.1 3.2 3.4 Felda Global Neutral 5.38 5.06 18,459.6 -9.6 -12.2 18.4 21.0 3.2 3.0 17.6 14.3 2.0 1.8 Genting Plantations Trading buy 10.64 9.40 7,133.2 0.4 3.4 16.1 15.6 2.0 1.8 12.4 11.7 1.3 1.3 IJM Plantations Buy 4.67 3.50 2,806.0 11.1 10.1 15.7 14.2 1.8 1.7 11.8 11.9 2.9 2.9 Kim Loong Resources Neutral 2.65 2.55 782.9 37.2 -8.5 8.4 9.2 1.5 1.5 18.2 15.9 5.3 6.0 Average 3.8 2.3 15.4 15.1 2.6 2.4 16.2 15.1 3.0 3.0 Source: Alliance Research, Bloomberg Share price date: 6 Aug 2012

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BACKGROUND A palm oil planter and miller Kim Loong Resources Berhad, via its holding company, Sharikat Kim Loong Sdn Bhd, commenced business with an old 1,000-acre rubber plantation at Ulu Tiram, Johor in 1967. They then proceeded to plant palm oil starting 1968 and have not looked back since. Kim Loong Resources (KIML) today has a total plantation hectarage of 15,192ha (80% in Sabah, the rest in Johor and Sarawak) of which 92% is planted with palm oil and the remainder with cocoa. From the total palm oil planted area, 91% (12,740ha) is mature while the remaining 9% (1,203ha) is still immature. KIML produced some 313k mt of FFB in in FY12 and achieved a matured yield of 23.79mt/ha. The most recent major land acquisition by KIML was back in 2010. The group paid RM25m for the acquisition of a 60% interest in Winsome Pelita (Pantu) Sdn Bhd, which owns 10,471ha of landbank in Sg.Tenggang and Kranggas, Sarawak. Of of the 10,471ha, some 6,500ha is deemed plantable. The land purchased came up to RM11,800/ha was reasonable at the time. However, the land acquired was subsequently classified as Native Customary Rights Land (NCR) and so far, the group has only managed to plant less than 1,500ha in the land. There is no visibility in the interim for planting in the remaining land. The bulk of the group’s earnings continue to be driven by estates in Sabah. KIML has extensive milling operations via the ownership of three palm oil mills which are located within their plantations in Kota Tinggi, Johor and Keningau and Telupid, Sabah. Total milling capacity of the group amounts to 1.2m mtpa of FFB of which they achieved a utilisation of 81% in FY12. Average OER (oil extraction rate) achieved by the group in FY12 was 21.8% while kernal extraction rate was 5.12%. The group mills almost all of the production coming out of their own estates and also purchases FFB from nearby estates for milling. In FY12, the group purchased an estimated 650k mt of FFB.

Figure 5 : Historical plantation statistics

Plantation area (Ha) FY08 FY09 FY10 FY11 FY12 Oil palm

Mature 11,193 11,193 12,828 13,074 12,740 Immature 1,042 1,104 732 794 1,203 Unplanted land - - 859 628 596 Total palm oil area 12,235 12,297 14,419 14,496 14,539 Cocoa and others 167 122 115 108 99 Total plantable area 12,402 12,419 14,534 14,604 14,638 Infra and unplantable land 646 629 629 592 554 Total area 13,048 13,048 15,163 15,196 15,192 FFB Production (mt) 248,268 272,334 262,687 227,325 313,035 FFB yield (mt/ha) 22.18 24.33 21.71 17.39 23.79 Mills

CPO production (mt) 138,994 145,441 172,147 165,252 210,784 OER (% FFB) 21.03 21.58 21.82 21.37 21.81 Palm kernel production (mt) 37,573 36,468 42,877 40,591 50,356 Kernel extraction rate (% FFB) 5.69 5.41 5.43 5.25 5.21 Palm kernel oil (mt) 11,405 9,697 12,136 7,759 1,557 Palm kernel oil extraction (% FFB) 45.3 45.4 44.83 44.92 46.12

Source: Company

Total hectarage of 15,192ha. 84% of that is planted with mature

palms

Bought land in Sarawak in 2010 but development has been very slow

Some 1.2m mtpa of FFB milling capacity. Latest utilisation of 81%

Healthy OER of 21.8% achieved in

FY12


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Figure 6 : Mills owned by KIML

Mill Yr Built Capacity (FFB tonnes/hour) Kota Tinggi 1996 100 Keningau 2003 60 Telupid 2008 45

Source: Company KIML possesses a nutraceutical plant, which is involved in the extraction of high quality tocotrienol-rich fraction (Vitamin E) from CPO. Current production has been experimental for the past 8 years but KIML is ready for commercial production and sales and is seeking approvals from the Health Ministry. The product will be called E-Life Gold. Currently, there are only two palm oil vitamin E health supplements available at local pharmacies. The more popular Tocovid SupraBio is made by Hovid Bhd while Sime Darby Bhd retails its product under the brand Tri-e. Besides this, KIML also ventured into biomass in 2007. Their first plant was built at their Kota Tinggi mill and uses empty fruit bunches (EFB), shells and mesocarp fibre to produce bio-fertiliser, which enhances soil fertility in its estates as well as generating small contribution by supplying to other planters. Since then a plant has been set up at the Keningau mill and one is being set up at the Telupid mill as well. As the plants are eco-friendly, they qualify as a Clean Development Mechanism (CDM) project under Kyoto Protocol, which entitles the plants to receive carbon credits. Eventually, KIML hopes to implement a gas engine system to generate renewable electrical power from palm oil effluent that can be sold to TNB. Shareholders and management KIML’s major shareholders comprise of the Gooi family (via Sharikat Kim Loong Sdn Bhd with a 63.8% stake) and management is also dominated by members of the Gooi family. Mr Gooi Seong Lim, aged 63, is the Executive Chairman while Mr Good Seong Heen, age 61, is the Managing Director. Siblings, Mr Gooi Seong Chneh and Mr Gooi Seong Gum have roles as executive directors. Recent developments KIML announced in June that their 90%-owned dormant subsidiary Okidville Plantations Sdn Bhd (OPSB) increased its issued and paid-up share capital. As a result, OPSB is now a 95% owned subsidiary of the group. Following that announcement, KIML said that OPSB together with another dormant subsidiary Winsome Jaya Sdn Bhd (WJSB) had entered into a development and joint venture agreement with PIJ Property Development Sdn Bhd (PPD). The purpose of the JV was to develop approximately 118 acres of palm oil estates. To note, PPD is a wholly-owned subsidiary of PIJ Holdings Sdn Bhd, which is in turn a wholly owned subsidiary of Perbadanan Islam Johor. The effective equity participation in the JV will be 70:30 between KIML and PPD. Given the very small tract of land being developed, we view the move to be quite insignificant to KIML as a whole. We view that the JV might have been formed with the purpose of knowledge transfer to PPD.

The group has also expanded into nutraceuticals but commercial

production has yet to commence

They also complement their mills with biomass utilisation to produce

fertiliser

KIML is majority owned by the Gooi family


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OPERATIONAL HIGHLIGHTS Plantation performance is generally above industry KIML’s palm oil estates which are largely located in Keningau, Sabah have performed above industry average except for FY11 when FFB yields declined to 17.39mt/ha for the year. In other years, especially in FY09 and FY12, the group has managed to surpass industry average yields in Sabah and also Malaysia in general. FY11 was a difficult year for many estates in Sabah which saw a combination of negative effects from an El Nino and then a La Nina which brought on extremely dry and extremely wet weather over the year. This was then exacerbated by tree stress as estates had 2 good years of production in FY09 and FY10. Typically, palm trees do show signs of stress (poor production) after periods of strong production. We attribute the group’s above industry FFB yields to good implementation of estate management best practices. In terms of OER (oil extraction rates), KIML is also above industry average. This is attributed to its efficient milling operations, good feedstock from the group’s estates, and also addition oil extraction from pressing of empty fruit bunches. In 2008, KIML commissioned the world’s first palm-pressed fibre oil extraction plant in Kota Tinggi. This had managed to increase extraction at the Kota Tinggi mill by 0.5%. The group has also built a second palm-pressed fibre oil extraction at their Keningau mill.

Figure 7 : FFB yield comparison with industry (mt / ha)

Year Sabah state yields Malaysia yields KIML Group Yield FY08 23.14 19.22 22.18 FY09 22.82 20.02 24.33 FY10 20.88 19.20 21.71 FY11 20.92 19.52 17.39 FY12 22.04 19.95 23.79

Source: MPOB, Company

Figure 8 : Oil extraction rate comparison with industry

OER (%) Sabah OER Malaysia OER KIML OER FY08 21.25 20.18 21.03 FY09 21.05 20.22 21.58 FY10 21.38 20.51 21.82 FY11 21.27 20.40 21.37 FY12 20.69 20.37 21.81

Source: MPOB, Company Steep decline in production for FY13 so far FY13 is looking to be a tough year for KIML. FFB production for the 5MFY13 period is down 36.1% y-o-y while CPO production is also down 23.6% y-o-y. Declines in FFB production have been felt across the industry but we view that KIML’s production statistics are more severe than the market trend. MPOB has reported that total Malaysia FFB production is down 13.4% y-o-y for the February to June period. We view that the contributing factors to KIML’s sharp drop in production this financial year so far to be:- 900ha of recently replanted hectarage as per the group’s replanting programme. This

makes up 6% of the group’s total planted hectarage. Tree stress after the bumper crop experienced in FY12. FY12’s crop was a record high for

KIML at 313,035mt for the year. Negative impact from the 2009 El Nino which had impacted pollination activities and in

turn resulted in a poor crop.

Well managed estates with FFB yields above industry

OER is also better than industry because of extraction from empty

fruit bunches

FY12 has been good but production in FY13 has taken a sharp turn

downwards

This has been largely because of replanting, tree stress and

exacerbation from the 2009 El Nino


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Figure 9 : FFB production trend Figure 10 : CPO production trend

Source: Company, MPOB Source: Company, MPOB

FINANCIAL HIGHLIGHTS Steady earnings growth for the past 3 financial years Earnings growth in FY08-FY09 was largely driven by additional capacity of 20mt/hr added to the Keningau mill as well as higher CPO ASP. In FY10 though, the group’s earnings declined despite an improvement in CPO production (+18% y-o-y) due to lower CPO ASP during year. CPO prices were very volatile as prices dropped to a low of RM1,721/mt in 2009. However going into FY11 and FY12, the group saw CPO prices swing back past the RM3,000/mt levels and this managed to bring up earnings. This is especially so for FY11 as there was a rise in earnings despite the 13.4% decline in FFB production. While Kim Loong typically does not disclose their CPO ASP, our model back-testing indicates that the group achieved a CPO ASP of above RM3,120/mt in FY12, RM2,945/mt in FY11 and RM2,330/mt in FY10.

Figure 11 : Historical earnings trend

Source: Company

Strong historical performance due to a combination of improved

production and higher CPO ASP


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But growth trend might not continue into FY13 FY13 has started off slow for KIML. For 1QFY13, the group saw a 32% decline in plantation revenue and 56% decline in plantation profits. This corresponded with a 27% decline in FFB production during the quarter. The decline was also caused by lower FFB selling prices. On milling operations, 1QFY13 revenues were flat y-o-y but profits were up on better OER and processing margins. That said, CPO production volumes were lower by 19% if compared y-o-y. All in all, KIML recorded a 18.6% y-o-y decline in their PBT for 1QFY13 despite that milling operations improved and better CPO ASP was recorded. The steep decline in FFB production was the cause of poor results this quarter.

Figure 12 : Results table

1QFY13 1QFY12

4QFY12 % y-o-y change

% q-o-q change Comments

Key financial highlights Revenue (RM m) 157.8 175.2 177.7 (9.9) (11.2) Decline due to 27% decline in FFB production despite higher CPO ASP Operating profit (RM m) 27.6 34.8 38.3 (20.8) (27.9) Exacerbated by higher operating costs Pretax profit (RM m) 28.6 35.2 36.0 (18.6) (20.4) Net profit (RM m) 17.4 19.9 20.0 (12.6) (12.9) Per share data EPS (sen) 5.7 6.5 6.5 (12.7) (12.9) Net DPS (sen) - - 10.0 BV/share (RM) 1.71 1.52 1.65 Margins Pretax (%) 18.1 20.1 20.2 (1.9) (2.1) Net profit (%) 11.0 11.4 11.2 (0.3) (0.2) Revenue breakdown Plantation 33.0 48.4 47.2 (31.9) (30.0) Lower production volume of FFB Milling ex-eliminations 124.8 126.7 130.6 (1.5) (4.5) Overall lower volume of FFB processed EBIT Breakdown Plantation 14.9 34.1 29.1 (56.3) (48.8) Milling ex-eliminations 12.7 0.76 9.2 1,570 38.1 Milling margins recovered with lower price of FFB and higher OER Source: Company, Alliance Research

INDUSTRY OUTLOOK Expecting CPO price to trend upwards We believe that CPO prices are going to settle into an uptrend over 2H12 because of impending poor weather caused by an El Nino as well as shortages in the soybean market. It was reported by the Australian Bureau of Meteorology (BoM) that climate indicators continued to show a shift towards an El Niño. El Niño climate events typically bring dry weather to palm oil plantation rich areas like Malaysia and Indonesia. Dry weather impacts the quality of fresh fruit bunches (FFB) and also affects the pollination process. The past two El Niño’s (2006-2007 and 2009-2010) saw periods of poor production and we believe that it will be the same case this time around. Poor production coupled with stronger exports from festive season demand is likely to lead inventory levels lower. This in turn is going to bring CPO prices higher over 2H12. According to MPOB, production for 6M12 is already 9.1% down y-o-y and latest inventory numbers are at a 14-month low.

We expect the group’s growth trend to reverse in FY13

1QFY13 net profits have already shown a 12.6% decline

We are overall positive on the industry, expecting an upward

trajectory in CPO prices


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Figure 13 : CPO production Figure 14 : Palm oil exports

Source: MPOB Source: MPOB

Figure 15 : Inventory tracker Figure 16 : Inventory-to-use* ratio tracker (1.4x long term average)

*The inventory-to-use ratio indicates the level of carryover stock for any given commodity as a percentage of the total demand or use.

Source: MPOB Source: MPOB, Alliance Research

The USDA (United States Department of Agriculture) has reported that drought in North America is dampening crop prospects and weather conditions are showing no signs of abating. With Chinese imports of soybean up 20.7% y-o-y for 5M12, we expect the soybean market to stay buoyant in the interim. Correlation between CPO and soybean prices is increasing, with the latest YTD correlation at 0.53 compared to just 0.349 over 1QCY12. This indicates that the high soybean prices caused by supply imbalances are likely to bring CPO prices on an upward trajectory as well. For 2012, we have a CPO ASP of RM3,300/mt while for 2013, we expect a CPO ASP of RM3,200/mt. We note that CPO prices are currently lagging behind soybean oil prices with the discount at roughly US$230/mt.

For our industry outlook, we project CPO prices to average at RM3,300/mt for the year


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EARNINGS OUTLOOK Tepid earnings despite higher y-o-y CPO ASP FY13 is expected to be a weak year for KIML after three years of strong growth. Given the steep decline in FFB production YTD and our expectation that production for the rest of the year is not going to able to catch up to levels seen in FY12, we are projecting for the group’s net profits to decline by 10.7% y-o-y. Our key assumptions for FY13 are:- 900ha of replanting and poor overall production will bring FFB production down by

15.5% y-o-y. We have forecast for matured yield to decline to 21mt/ha from 23.8mt/ha. Higher CPO ASP of RM3,200/mt versus RM3,120/mt in FY11 will partly mitigate the

impact of lower production but not enough to prevent a y-o-y earnings contraction. Going into FY14, we are expecting earnings to be flat y-o-y. This is largely because our CPO ASP for FY14 of RM3,100/mt is lower than our assumption for FY13. The impact from lower CPO ASP is expected to be slightly mitigated by improvement in the group’s FFB yield by 1mt/ha to 22mt/ha. We expect that after the low in yields seen over FY13, there could be some recovery going into 2014 as tree stress conditions abate and also on the possibility of improved weather in 2H14. Our earnings expectations decline again for FY15 as we expect lower CPO ASP of RM3,000/mt. We highlight that our CPO ASP for the group is lower than our CPO ASP expectation for the industry. This is a conservative assumption made by us on the expectation that the group’s sells their product to refineries at slightly below market prices. The summary of our key assumptions is listed below.

Figure 17 : Key assumptions for the plantation segment

2010A 2011A 2012A 2013F 2014F 2015F Total planted area (ha) 14,409 14,496 14,539 14,539 14,539 14,539 Immature 5% 5% 8% 13% 11% 9% Mature 89% 90% 88% 83% 85% 86% Unplanted 6% 4% 4% 4% 4% 4% FFB yield per matured ha (mt/ha) 19.20 16.50 23.65 21.00 22.00 22.00 Weighted avg FFB yield (mt/ha) 18.21 15.70 21.53 18.20 19.57 19.83 FFB production growth (%) -3.5 -13.5 37.7 -15.5 7.5 1.4 OER (%) 21.8 21.4 21.8 21.5 21.5 21.5 CPO production growth (%) 18.7 -4.3 27.7 -14.1 9.0 1.4 CPO ASP (RM/mt) 2,330 2,945 3,120 3,200 3,100 3,000 PKO ASP (RM/mt) 2,590 4,237 4,745 3,488 3,379 3,270 Source: Company, Alliance Research

We forecast for a 10.7% decline in net profits for FY13

Lower production will offset the positive impact from higher CPO

ASP


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Figure 18 : Earnings trajectory going forward

Source: Company, Alliance Research Steady payout of dividends Kim Loong has a net dividend policy of a minimum 30% payout but so far the group has consistently exceeded this target. In FY12, the group paid out a 13sen net dividend for the year (41% payout) and in FY11 they paid out 11sen net dividends, amounting to a 58% payout. Going forward, we expect the group to maintain dividends above their minimum policy and project for a 55% payout in FY13 and the years beyond. To note, a 10sen single tier dividend was recently announced (in respect of FY12 to be paid in FY13) and we expect another 5.3 sen net dividend for this financial year. In terms of yield, a 15.3sen payout in FY13 translates into a dividend yield of 6.0% on yesterday’s closing price. With no major capex coming up, we view that KIML may be slightly more generous with their dividend payouts.

Figure 19 : Dividend net yield and payout ratio

Source: Company, Alliance Research

VALUATION AND RECOMMENDATION Initiating coverage with a NEUTRAL recommendation We initiate coverage on Kim Loong Resources with a NEUTRAL recommendation. We view that despite the high potential for CPO prices to head into an upward trajectory later this year, earnings accretion from the higher CPO ASP would be offset by a 15% decline in FFB production. Over the longer term, we do not see major growth for the group unless an acquisition is made or the NCR land is allowed for new plantings. Earnings accretion from sales of nutraceuticals and also biomass electricity sales could surprise on the upside mildly when it comes on stream in 2013 or 2014. That said, the group does offer a fairly attractive net dividend yield of 6.0% which will support share price at current levels.


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We value the company at their long term average P/E multiple of 9.6x. Pegging this to FY13 fully diluted EPS of 27.7sen derives our target price of RM2.65/share. Key risks We see upside risks to our earnings and therefore target price in the event of a stronger

than expected upswing in CPO prices and we expect the reverse if CPO prices trend down strongly. In terms of sensitivity, we calculate that every RM200/mt increase in CPO prices will lead earnings up by 10.6%.

Extreme and prolonged weather events like a La Nina and/or El Nino could lead to production lower than we have already expected. We calculate that every 1mt/ha decline in FFB production by the group would bring earnings down by 4.3%. A spell of poor weather will also lower the amount of FFB that the group is able to purchase for their milling activities; this may in turn exacerbate the decline in earnings.


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Kim Loong Resources Financial Summary

Balance Sheet Income StatementFY 31 Jan (RM m) 2011A 2012A 2013F 2014F 2015F FY 31 Jan (RM m) 2011A 2012A 2013F 2014F 2015F

PPE 369.2 366.3 367.0 367.0 366.2 Revenue 563.4 768.3 649.7 686.1 673.1Investment properties - - - - - EBITDA 112.2 190.7 166.9 167.7 159.1Property development - 2.7 - - - Depreciation & amortisatio (21.9) (23.7) (19.3) (20.0) (20.8)Inventories 28.8 43.3 33.2 35.0 34.4 EBIT 90.2 166.9 147.6 147.7 138.3Receivables 21.4 107.2 98.0 98.9 98.5 Net interest income 0.4 (1.9) (4.7) (4.5) (4.5)Other assets 87.3 9.5 9.5 9.5 9.5 Share of associates - - - - -Deposit, bank and cash 115.1 188.0 234.1 295.8 356.4 Pretax profit 90.6 165.0 142.9 143.1 133.8Total Assets 621.7 717.0 741.8 806.2 865.0 Taxation (19.0) (40.3) (31.4) (31.5) (29.4)

Minority interest (13.4) (28.8) (25.7) (25.7) (24.1)LT borrowings 41.3 76.9 83.9 82.9 81.9 Net profit 58.3 96.0 85.7 85.9 80.3ST borrowings 6.3 20.8 14.4 14.4 14.4 Adj net profit 58.3 96.0 85.7 85.9 80.3Payables 27.1 40.8 17.9 18.9 18.5 Other l iabil ities 55.4 0.1 0.1 0.1 0.1 Key Statistics & RatiosLiabilities 130.1 138.5 116.2 116.2 114.9 FY 31 Jan 2011A 2012A 2013F 2014F 2015F

Share capital 305.3 306.6 307.7 307.7 307.7 GrowthReserves 139.9 200.8 221.0 259.7 295.8 Revenue 24.8% 36.4% -15.4% 5.6% -1.9%Shareholders' equity 445.1 507.4 528.7 567.3 603.5 EBITDA 10.0% 70.0% -12.5% 0.5% -5.1%

Pretax profit 14.1% 82.1% -13.4% 0.2% -6.5%Minority interest 46.5 71.2 96.9 122.6 146.7 Adj Net profit 21.0% 64.8% -10.7% 0.2% -6.5%Total Equity 491.6 578.5 625.6 690.0 750.2 Adj EPS 20.1% 63.4% -11.0% 0.0% -6.5%

Total Equity and Liabilities 621.7 717.0 741.8 806.2 865.0 ProfitabilityEBITDA margin 19.9% 24.8% 25.7% 24.4% 23.6%Net profit margin 10.3% 12.5% 13.2% 12.5% 11.9%

Cash Flow Statement Effective tax rate 21.0% 22.0% 22.0% 22.0% 22.0%FY 31 Jan (RM m) 2011A 2012A 2013F 2014F 2015F Return on assets 9.4% 13.4% 11.6% 10.7% 9.3%

Return on equity 13.1% 18.9% 16.2% 15.1% 13.3%Pretax profit 90.6 165.0 142.9 143.1 133.8 Depreciation & amortisatio 21.9 23.7 19.3 20.0 20.8 LeverageChange in working capital 4.9 (13.1) (0.9) (1.7) 0.6 Total debt / total assets 0.13 0.12 0.11 0.10 0.09Net interest received / (pai (2.0) (1.9) (4.7) (4.5) (4.5) Total debt / equity 0.19 0.17 0.16 0.14 0.14Tax paid (18.5) (40.3) (31.4) (31.5) (29.4) Net debt / equity -0.15 -0.18 -0.26 -0.35 -0.43Others 0.0 1.9 4.7 4.5 4.5 Operating Cash Flow 97.0 135.4 129.9 130.0 125.8 Key Drivers

FY 31 Jan (RM m) 2011A 2012A 2013F 2014F 2015FCapex (31.7) (29.4) (20.0) (20.0) (20.0) Others 0.6 0.7 - - - CPO ASP (RM/mt) 2,945 3,120 3,200 3,100 3,000Investing Cash Flow (31.2) (28.7) (20.0) (20.0) (20.0) FFB Yield Matured (mt/ha) 17.4 23.8 21.0 22.0 22.0

Planted Ha ('000) 14.4 14.5 14.5 14.5 14.5Issuance of shares 1.7 1.3 1.1 - - Changes in borrowings (11.0) 18.0 0.6 (1.0) (1.0) ValuationDividend paid (34.3) (44.6) (65.5) (47.2) (44.2) FY 31 Jan 2011A 2012A 2013F 2014F 2015FOthers - (7.6) - - - Financing Cash Flow (43.6) (32.9) (63.8) (48.2) (45.2) EPS (sen) 19.1 31.4 27.9 27.9 26.1

Adj EPS (Sen) 19.0 31.1 27.7 27.7 25.8Net cash flow 22.3 73.8 46.1 61.7 60.6 P/E (x) 13.4 8.2 9.2 9.2 9.9Forex - - - - - EV/EBITDA (x) 7.1 3.9 4.4 4.1 4.1Beginning cash 92.9 114.3 188.1 234.1 295.8 Ending cash 115.1 188.1 234.1 295.8 356.5 Net DPS (sen) 11.0 13.0 15.3 15.4 14.4

Net dividend yield 4.3% 5.1% 6.0% 6.0% 5.6%

BV per share (RM) 1.43 1.65 1.72 1.84 1.96P/BV(x) 1.8 1.5 1.5 1.4 1.3

Price Date: 06 August 2012


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DISCLOSURE Stock rating definitions Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more Buy - Expected 12-month total return of 15% or more Neutral - Expected 12-month total return between -15% and 15% Sell - Expected 12-month total return of -15% or less Trading buy - Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable Sector rating definitions Overweight - Industry expected to outperform the market over the next 12 months Neutral - Industry expected to perform in-line with the market over the next 12 months Underweight - Industry expected to underperform the market over the next 12 months Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date


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kim loong resources · kiml’s palm oil estates which are largely located in keningau, sabah have...

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