Tuesday, August 9

KLK benefits from IOI Corp’s RSPO suspension, sees rise in CSPO sale


KUCHING: Analysts believe planter Kuala Lumpur Kepong Bhd (KLK) stands to gain from competitor IOI Corporation Bhd’s (IOI) Roundtable for Sustainable Palm Oil (RSPO) suspension.

RHB Research Institute Sdn Bhd (RHB Research) noted that KLK managed to do some forward sales in the first quarter (1Q), albeit not a significant amount of 25 to 30 per cent of 1Q’s output.

“However, it is currently benefitting from the sale of more certified sustainable palm oil (CSPO) products as a result of IOI Corp’s suspension from the RSPO,” it said in a note earlier this week. “Currently, close to 50 per cent of its products – from 30 per cent previously – are sold with a CSPO premium.

“The premium has also risen to about US$35 to US$40 per tonne from US$20 to US$25 per tonne previously.”

Notably, KLK currently produces approximately 750,000 tonnes of RSPO-certified oil, of which 70 per cent is fully segregated and 30 per cent is mass balance.

RHB Research said KLK’s crude palm oil (CPO) production costs are expected to rise by five to 10 per cent year on year in FY16 to around RM1,350 per tonne from RM1,268 per tonne in FY15. This was on the back of higher labour costs and lower yields of fresh fruit bunch (FFB).

“In terms of fertiliser costs, KLK expects to finish its required application for the year by July or August, in time for the monsoon season,” it added. “As we have already imputed a five per cent y-o-y increase in our cost assumptions, we leave our cost projections unchanged.”

On other updates, KLK said its new planting in Liberia has been delayed again due to all the new regulations that have been put in place by RSPO.

“As such, KLK is unlikely to plant up any land in FY16, but is targeting new planting of 1,500ha in FY17,” RHB Research noted. “Currently, KLK has 7,000ha of rehabilitated planted landbank in Liberia, which are between two to three years in age.

“As for replanting, KLK is targeting to plant up 2,000ha in FY16, with 1,000ha planted year to date.”

Meanwhile, KLK’s year to date May FFB output is down 4.5 per cent y-o-y, impacted by the dry weather experienced in Sabah and Riau. Rain has started to fall since March, although RHB Research said there are still certain areas such as Sabah and Central Kalimantan that remains dry.

“For FY16 ending September, the group expects to end the year with flat to marginally positive FFB output growth, as it expects to see a recovery in the last few months of its financial year.

“For FY17, the company is maintaining its guidance of a small single-digit growth of FFB, which is in line with our 2.5 per cent growth projection.”

After reducing its property division profits, adjusting capex assumptions and reducing our new planting targets, RHB Research reduced its FY16-18 earnings forecasts down by one to nine per cent per annum. A key downside risk is the weather abnormalities, it highlighted.

“We maintain our buy call with a target price of RM26.20. We like KLK as it is more geographically-diversified landbank reduces the risk in extreme weather situations, while its downstream facilities continue to record improving margins.

“We also highlight that every RM100 per tonne change in CPO prices could affect KLK’s net profit by four to six per cent per annum.”