Indonesia’s potential floor wage hike can hurt KLK

By NUR HAZIQAH A MALEK

The possible minimum wage hike in Indonesia could pose an adverse impact to the earnings of plantation firm Kuala Lumpur Kepong Bhd (KLK), said PublicInvest Research.

The research firm in a company update noted that a bumper hike in minimum wage in polls-looming Indonesia would be worrying for KLK’s financial performance.

“Following the implementation of the new minimum wage of RM1,100 a month (in Malaysia) effective this year, the group sees a small impact of -2% on its bottom line.

“However, the more worrying issue is the minimum wage hike in Indonesia this year as the general election is expected to be held soon,” the research firm pointed out, adding that a significant hike of 10%-20% is anticipated.

If the minimum wage is increased by 10%-20%, the Indonesian general worker wages will be almost on par with Malaysia’s level.

Indonesian Manpower Minister Muhammad Hanif Dhakiri had in October 2018 proposed an 8.13% rise in the provincial minimum wage (UMP) for 2019. The Indonesian Workers Confederation, however, had rejected Hanif’s proposal, demanding for the UMP to be raised instead by 20%-25%.

KLK’s plantation business — which remains a primary earnings contributor — has vast exposure in Indonesia.

KLK is among the largest plantation companies in Malaysia, with a landbank of close to 285,000ha, from which approximately 51% is located in Indonesia.

In Indonesia alone, the firm has 11 palm oil mills, two kernel crushing plants, two refineries and three biogas power plants.

Meanwhile, PublicInvest said KLK’s strong oleochemical business is expected to drive the plantation firm’s slow recovery in the second half of 2019 (1H19) despite the current low crude palm oil (CPO) price.

KLK is not affected by lower CPO prices — if compared to its industry peers — thanks to its oleochemical business which buffers the price exposure in the upstream segment.

PublicInvest highlighted that KLK expects to see the current weak CPO price performance remaining as the key challenge to its plantation segment for 1H19, as it expects CPO prices to hover around RM2,100 to RM2,200 per metric tonne for the next three months.

“Meanwhile, its oleochemical segment is expected to maintain its performance with higher capacity utilisations and operational efficiencies,” he said.

PublicInvest has maintained a ‘Neutral’ call on KLK, with an unchanged target price of RM22.86. The company’s shares closed 14 sen down to RM24.06 yesterday.