KLK’s profit to rise on high CPO prices

KLK is confident in recording 10% YoY increase in production during FY21, supported by newly matured trees with visible upside risk


KUALA Lumpur Kepong Bhd (KLK) is expected to chart a higher profit in its first quarter of financial year 2021 ended Dec 31, 2020 (1QFY21), driven by contracted supplies which had triggered the crude palm oil (CPO) prices, said analysts at Bloomberg Intelligence.

Agriculture analysts Alvin Tai and Ashley Kim said the operating profit of KLK’s plantation segment is likely to have risen RM174.6 million on the back of the rise in average palm oil price.

“KLK’s fiscal 1Q profit likely increases on the stronger palm oil prices, mitigated by the weaker oleochemical segment’s profit.

“Its plantation segment’s contribution is likely to be higher. It is effectively more than doubled its profit from 1Q20.

“The fresh fruit bunches production of 973,800 tonnes was flat against 1Q20, a little change from a 0.5% deficit in 4Q,” the analysts said. KLK is scheduled to announce its quarterly results this week.

RHB Investment Bank Bhd (RHB Research) said the company’s production in 1Q21 is likely to have declined slightly by 0.4% on an annual comparison due to heavy rainfall during the La Nina cyclical season.

Despite the cutback, its analyst Hoe Lee Leng said KLK is confident in recording a total of 10% year-on-year (YoY) increase in its production during FY21, supported by newly matured trees with visible upside risk of the prolonged wet weather pattern.

“KLK’s production declined by 0.4% in 1Q21. Despite this, KLK reiterated its FY21 growth guidance

of 10% YoY, excluding contributions from recent land acquisitions, on the back of 12,000ha of the new area coming into maturity.

“However, KLK noted that if the current heavy rainfall and restrictions on foreign hiring persist, this would put downward pressure on its forecasts,” she said in a report on Jan 29.

However, Hoe said the research outfit is maintaining a more conservative projection for KLK’s FY21 production at 4% growth YoY, as the company is currently experiencing a 10% labour shortage in West Malaysia, while the situation in Sabah remains manageable. Throughout FY21, the company is expected to record an improvement in its downstream margin due to the higher CPO supplies channelled to its refineries upon the completion of its third plant, said Hoe.

“The utilisation rates for its Indonesian and Malaysian refineries currently stand at 70% and 100% respectively.

“The lower rate for its Indonesian operations is due to the shortage in CPO supply around the area.

“Upon the completion of its third refinery plant, which is estimated to be in August 2022, CPO from KLK’s own estates to be channelled downstream will rise from between 65% and 70% currently to 90%,” she said.

Currently, the utilisation rates of KLK’s oleochemical plants are at 90% and it is planning to expand the total capacity by 5% in 2022.

On KLK’s venture into nitrile gloves, RHB Research is adopting a cautious stance on diversification, given the immense supply expansions globally, as well as the present shortage of nitrile butadiene rubber.

“While labour recruitment is a concern, KLK has already recruited an encouraging number of locals as it began hiring last year. The first phase of manufacturing requires 400 to 500 workers.

“We are wary of this diversification although glove manufacturing is not new to KLK. It already has a 65 million-capacity reusable glove plant that has been running for more than 20 years.

“We have not imputed this into our forecasts yet,” Hoe said.

KLK is currently building a new nitrile glove plant in Perak with a production capacity of 4.5 billion pieces per annum.

The facility will contain 15 pro-duction lines, costing the firm RM200 million, of which will be rolling out in two phases.

The first phase, which consists of eight lines, is expected to be completed by the first half of 2022, while the first line is expected to be commissioned by June-July this year.

RHB Research is maintaining its ‘Buy’ recommendation with a higher target price of RM27.10 based on an unchanged 25 times FY21F price-earnings (PE) for the plantation unit, 15 times FY21F PE for the manufacturing business and a 70% discount applied to the RNAV (revalued net asset value) of its property landbank.

KLK is expected to announce its financial performance for its 1QFY21 tomorrow.

Its share price closed at RM23.08 yesterday, an eight sen or 0.35% higher with a market capitalisation of RM24.95 billion.