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KMLOONG – Fundamental Analysis FY15

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Fundamental Analysis of Kim Loong Resources Berhad by L. C. Chong

https://lcchong.wordpress.com/
https://www.facebook.com/groups/285121298359919/

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KMLOONG – Fundamental Analysis FY15

  1. 1. KMLOONG FUNDAMENTAL ANALYSIS Financial Year 2015 (31 Jan 2015) L. C. Chong 27 January 2016 (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)
  2. 2. DISCLAIMER I am NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. You and I may have different opinion, but I respect your opinion. All figures in MYR and in '000s, except per share data 2
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of KMLOONG.
  4. 4. SCOPE • Figures and ratios are based on the figures reported in Annual Report or the latest Q4 Quarterly Report (QR) • Unless there is a need, this analysis will not include financial figures reported in Q1, Q2 and Q3 • I will provide QR result highlights in my blog • Valuation is not covered in this analysis • I will provide valuation in my blog.
  5. 5. CHANGES • 26 Jan 2016 – First write up of KMLOONG in PowerPoint format
  6. 6. OTHER REFERENCES • Investment Analysis on Crude Palm Oil Industry – Handout and Data sheets • To be fair to the people who paid for my workshop, I will just show the high level comparison between KMLOONG and its peers.
  7. 7. BUSINESS PROFILE
  8. 8. BUSINESS PROFILE • The Group’s operations are divided into two main business segments: • Plantation - cultivation of oil palm • Milling - processing and marketing of oil palm products
  9. 9. OWNERSHIP SUMMARY CORPORATIONS (PRIVATE) 69% PUBLIC AND OTHER 20% INDIVIDUALS/INSIDERS 6% INSTITUTIONS 2.51% CORPORATIONS (PUBLIC) 2%
  10. 10. TOP 5 SHAREHOLDERS SHARIKAT KIM LOONG SENDIRIAN BERHAD 91% TEO CHUAN KENG SDN. BHD. 3% IOI CORP.BHD 3% KRISHNAN CHELLAM 2% KOPERASI POLIS DIRAJA MALAYSIA BERHAD, ASSET MANAGEMENT ARM 1%
  11. 11. OWNERSHIP ANALYSIS • The shareholder with the largest stake in KMLOONG is SHARIKAT KIM LOONG SENDIRIAN BERHAD, with a 63% stake • Institutional funds only owned 2.5% of KMLOONG.
  12. 12. ECONOMIC MOATS
  13. 13. ECONOMIC MOATS • Cost Advantage (Wide) • Despite fluctuation of CPO prices, KMLOONG managed to maintain gross margin above 19%, and EBITDA margin above 18% since 2009 • Switching Cost (No) • Too many players in the market • Network Effect (Not applicable) • Efficient Scale (Not applicable)
  14. 14. ECONOMIC MOATS (CONT.) • Intangible Asset (Wide) • Use of high yield germinated seeds, and stringent culling process to select the best yield seedling • Manual and timely fertiliser application • Conducts "sense test" every four months to estimate the FFB production of the following quarter • Hires an experienced manager in each estate size of 5,000 acres to monitor the estate Successful Agronomic Management • Each of KMLOONG's mills is strategically located near to/in the KMLOONG plantation estate and the supply of FFB • The ample supply of FFB could increase the processing margin while the close proximity to FFB suppliers minimise the transportation time and cost Strategic Location • KMLOONG designed or modified internally many of the highly efficient equipment or machineries. They are able to save on PPE cost and thus achieve greater processing margin while enjoying the exclusivity of their technology • Developed the world's first palm-pressed fibre oil extraction (PFOE) plant with Eonchem Technology in 2005 Continuous Innovations • KMLOONG mills fully process all the by-products of oil palms and even to the extent of making profit out of them besides being environmental friendly • Uses the solvent extraction technology to extract residual palm oil from palm-pressed fibres to increase the OER by approximately 0.5% Total Waste Management
  15. 15. ECONOMIC MOATS (CONT.) 14.8% 26.2% 14.1% 14.1% 17.1% 14.5% 26.6% 12.6% 16.9% 21.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2011-01-31 2012-01-31 2013-01-31 2014-01-31 2015-01-31 ROIC & CROIC ROIC % CROIC % In the past 5 years, KMLOONG managed to maintain more than 10% of ROIC and CROIC. By MorningStar’s definition, KMLOONG has a wide economic moat.
  16. 16. ECONOMIC MOATS (CONT.) • Ranking of KMLOONG, in terms of ROIC and CROIC • If compare to 41 peers in CPO industry – TOP 5 in the past five years • If compare to peers that produce 300K-700K mt – No. 1 in the past five years.
  17. 17. PERFORMANCE PROFILE Production and Operation Efficiency
  18. 18. PLANTABLE AREA 2011 2012 2013 2014 2015 Mature (ha) 13,074 12,740 12,827 13,012 13,581 Immature (ha) 794 1,203 1,523 1,874 1,320 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 12,200 12,400 12,600 12,800 13,000 13,200 13,400 13,600 13,800 Immature(ha) Mature(ha)
  19. 19. PLANTABLE AREA (CONT.) • The immature area started to become mature in FY15 • Production of FFB is expected to increase approx. 2% from 304,732 mt (FY15) to 309,680 mt (FY16).
  20. 20. PLANTABLE AREA (CONT.) 628 596 732 468 461 0 100 200 300 400 500 600 700 800 2011 2012 2013 2014 2015 ha Reserves The main challenge of KMLOONG in the next few years is to increase its reserve lands.
  21. 21. FFB PRODUCTION AND YIELD 17.39 24.57 21.86 22.07 22.44 0.00 5.00 10.00 15.00 20.00 25.00 30.00 2011 2012 2013 2014 2015 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 Yield MT FFB Production (mt) FFB Yield
  22. 22. FFB PRODUCTION AND YIELD (CONT.) 2011 2012 2013 2014 2015 KMLOONG 17.39 24.57 21.86 22.07 22.44 Industry Avg. 19.44 19.78 19.59 20.10 20.86 0.00 5.00 10.00 15.00 20.00 25.00 30.00 FFB Yield – Comparison with Industry Avg. FFB yield of KMLOONG is above industry average
  23. 23. FFB PRODUCTION AND YIELD (CONT.) 0.00 5.00 10.00 15.00 20.00 25.00 Latest FFB Yield by Company KMLOONG
  24. 24. CPO EXTRACTION AND EFFICIENCY 21.37% 21.81% 22.09% 22.19% 22.39% 20.80% 21.00% 21.20% 21.40% 21.60% 21.80% 22.00% 22.20% 22.40% 22.60% 0 50,000 100,000 150,000 200,000 250,000 300,000 2011 2012 2013 2014 2015 MT CPO Extraction (mt) Oil Extraction Rate (%)
  25. 25. CPO EXTRACTION AND EFFICIENCY (CONT.) 21.37% 21.81% 22.09% 22.19% 22.39% 20.68% 20.69% 20.59% 20.88% 21.51% 19.50% 20.00% 20.50% 21.00% 21.50% 22.00% 22.50% 23.00% 2011 2012 2013 2014 2015 Oil Extraction Rate – Comparison with Industry Avg. KMLOONG Industry Average • OER of KMLOONG is way above industry average • Top 3 in the industry.
  26. 26. CPO EXTRACTION AND EFFICIENCY (CONT.) 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Latest OER% by Company KMLOONG
  27. 27. FINANCIAL PERFORMANCE
  28. 28. PROFITABILITY 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Revenue
  29. 29. PROFITABILITY (CONT.) 20.7% 17.9% 16.5% 21.7% 15.0% 15.1% 15.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 0 50,000 100,000 150,000 200,000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 EBIT and EBIT Margin EBIT EBIT Margin %
  30. 30. PROFITABILITY (CONT.) 0 50,000 100,000 150,000 200,000 250,000 300,000 0.00 200.00 400.00 600.00 800.00 1,000.00 1,200.00 1,400.00 MYR’000 USD/MT CPO Prices vs. Profitability EBITDA Revenue CPO Prices (USD/MT)
  31. 31. PROFITABILITY (CONT.) • Despite bearish CPO prices in the past 5 years, KMLOONG still managed to maintain its revenue in the range of 150,000 and 195,000 • Its operational excellence protects itself from poor CPO prices • Even if Its EBIT margin decreased from 20.7% (FY09) to 15% (FY13), but KMLOONG still managed to maintain EBIT margin at 15% for three years • The latest EBIT margin of KMLOONG (15.5%) can be rated as Baa.
  32. 32. LEVERAGE & COVERAGE 0.38 x 0.58 x 0.41 x 0.21 x 0.32 x 0.42 x 0.37 x 0.00 x 0.10 x 0.20 x 0.30 x 0.40 x 0.50 x 0.60 x 0.70 x Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Debt / EBITDA Debt/EBITDA can be rated as Aa.
  33. 33. LEVERAGE & COVERAGE (CONT.) 182.13 x 73.41 x 51.00 x 101.12 x 99.64 x 106.33 x 114.67 x 0.00 x 50.00 x 100.00 x 150.00 x 200.00 x Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 EBITDA/Interest EBITDA/Interest can be rated as Aa.
  34. 34. LEVERAGE & COVERAGE (CONT.) 9.0% 10.3% 8.0% 5.9% 5.6% 7.0% 7.1% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Debt / Book Capitalization Debt/Book Capitalization can be rated as Aa.
  35. 35. LIQUIDITY 0 5 10 15 20 25 30 35 0 5 10 15 20 25 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Days In Inventory 19 30 25 23 31 28 18 Days In Receivables 14 15 11 10 15 13 8 Days Payable Outstanding 15 23 23 22 30 28 24 Cash Conversion Cycle 18 22 13 11 15 12 2
  36. 36. GROWTH DRIVERS
  37. 37. GROWTH DRIVERS • 11 Jul 2015 - Its wholly owned subsidiary, Winsome Plantations S/B has entered into a supplemental agreement to the joint venture agreement with Pelita Holdings S/B to develop approximately 367 hectares of new state land in addition to the approximately 1,700 hectares of existing state land at Sri Aman Division, Sarawak, into oil palm plantation together with facilities and the provision of services ancillary • 30 Jun 2014 - Expansion in Sarawak - Looking into acquiring 12,410ha of land in Sarawak as the plantation group aims to expand its oil palm business in the state.
  38. 38. GROWTH DRIVERS (CONT.) 0 5 10 15 20 25 30 35 40 45 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Development of the world biodiesel market World biodiesel production World biodiesel trade Source: OECD-FAO Agricultural Outlook 2015
  39. 39. GROWTH DRIVERS (CONT.) Source: National Centers for Environmental Information • El Nino event ranks among three strongest since 1950 • LMC's Fry says full-blown El Nino could push prices to $800 • Prediction: A 9% drop in Indonesian production and 4.5% slide in Malaysian output on a full-blown El Nino • Both Indonesia and Malaysia also have high inventories to cushion the impact of a shortage Source: Bloomberg 27 Nov 2015
  40. 40. ISSUES/RISKS/CHALLENGES
  41. 41. ISSUES/RISKS/CHALLENGES • FY15 Q3 - Unfavourable outcome of a court case made by some natives against its subsidiary, Tetangga Akrab Pelita (Pantu) Sdn Bhd (currently known as Winsome Pelita (Pantu) Sdn Bhd), regarding their customary rights to land. • The group has accounted for impairment of assets and provision of contingent liabilities of RM3mil • Labor shortages • CPO price yet to turn to bullish. The CPO price moves in a cyclical manner. In a worst case scenario, KMLOONG, a net cash company with a low cost of production and an experienced management team would be able to withstand the turbulence and even take up expansion opportunities.
  42. 42. ISSUES/RISKS/CHALLENGES Resistance zone: 2520 - 2660 • CPO already shown sign of bullish reversal • Now, it is time for it to form an uptrend • The key is whether it can break the next resistance zone as below.
  43. 43. GOING FORWARD
  44. 44. SHAREHOLDER RETURN Time Frame Date Bought at Original Value Dividend Received Unrealized Gain/Loss Current Return CAGR % 3-Y 23 Jan 2013 2.24 2,240 500 840 3,580 17% 5-Y 26 Jan 2011 2.41 2,410 780 670 3,860 10% 10-Y 26 Jan 2006 0.814 814 2,034 3,498 6,346 23% Assumptions: 1. Commission paid is ignored in this simulation 2. The current price is 3.08 (as of 26 Jan 2016) 3. Unit purchased is 1,000.
  45. 45. GOING FORWARD • I believe that • CPO price will remain stable in 2016 • FFB and CPO production of KMLOONG will increase marginally in 2016 • I just accumulated KMLOONG recently.

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