Kim Loong Resources 3QFY09 : Bad news in the price
· Below Expectations
Annualised, Kim Loong’s 9M08 net profits came in below our expectations by some 18% while revenue numbers were largely inline with our expectations. The differential came from a lower than expected margins seen in its plantations as well as milling operations. For the quarter, the
Group achieved a average CPO selling price of RM2420 per mt as opposed to RM3500 achieved in 2Q09. As a point of comparison, the Group did better than the RM2231 MPOB price average during the period due to forward selling when prices were above RM3000 per mt. We expect that Kim Loong should be able to achieve a full year CPO price of RM2800 for FY09. YTD the Group has achieved an ASP of RM3150.
· Difficult times are in the price
It is well known in the market that plantation companies have been having a trying time of late but we are of the general opinion that the worst is almost over. With the industry going into a down cycle period likely starting December, we see that CPO prices could improve from here as
stock levels ease slightly. The only factor we believe that could hamper CPO prices in the coming 6m are exports which might not see significant improvement given the state of global economies at this juncture. Naturally, with a high correlation of Kim Loong’s share price to CPO prices, any gradual improvement in CPO price will positively impact the group.
· RM2175 for FY10
We have factored in a CPO ASP of RM2175 for FY10 and RM2300 for FY11. We had made the adjustment down during the release of our recent sector report issued early December (previous FY10 assumption was RM2300 as well).
· Upgrade to BUY, small upside potential over coming 12m
Changes have been made to our earnings estimates to reflect that operating costs are going to be higher than our previous projections in FY10 (adjusted down by 16%). To note, despite this, we still expect that operating costs will be lower than FY09 due to the expectation that fertilizer costs will eventually ease. We have moved into a DCF valuation methodology for our plantations coverage hence our new TP comes up to RM1.70 which shows some small 13% upside to the current price of RM1.50 hence our upgrade to BUY.