Unexciting quarters ahead for KLK with weak CPO price

KUCHI NG: Unexc i t ing quarters are ahead for Kuala Lumpur Kepong Bhd ( KLK) as the plantat ion player continues to be plagued with crude palm oil (CPO) price weakness and weak production rates.

In a recent company update report, analyst Kenanga Investment Bank Bhd ( Kenanga Research) detailed the current average CPO price has been rather soft at RM2,374 per metric tonne as it is a - 3.8 per cent quarter over quarter |(q- o- q) and a -13.6 per cent yea r over yea r ( y- o - y) decrease.

And the price is expected to stay unevent ful in the immediate term as KLK’s management guides that buyers are taking a wait- andsee approach amid multiple concerns such as further weakness in US soybean oil prices in the aftermath of China’s 25 per cent tariff on US soybean and a strongerthanexpected product ion pick up in the second half (2H).

“Other feedbacks include that some buyers are either holding back purchases or seeking lower prices in anticipation of further CPO price weakness.

“On the other hand, we believe the current CPO price of RM2,155 is supported the Brent crude oil price of circa RM2,200 per MT and smal lholders’ production cost of RM1,800 to RM2,000 per MT,” said the research arm.

In addition, KLK’s is also seeing weaker fresh fruit bunch ( FFB) growth as its management has revised their growth guidance from 5 to 6 per cent to 3 per cent.

“This is below our forecast of 110 per cent and the peer average of 5 per cent,” commented the research arm.

The main cause for the lag in FFB growth is attributable to lower product ion yield stemming from the dry weather in Kalimantan and Sumatra last year and the extended Eid Al-Fitr holidays this year which slowed production and harvesting as estate workers were away.

Despite its uninspiring plantation sector, Kenanga research points out that the trended up brent crude oil prices has in turn driven up oleochemicals demand and in turn improved the competitiveness of the group’s methyl ester- based products such as detergents.

“In addition, management has said that the RSPO certification status of KLK’s palm oil products at circa 72 per cent cert i f ied and palm kernel products at circa 76 per cent has helped sustain the demand from Europe.

“Un f o r t u n at e ly, t he segment ’ s PBT margin is expected to normalise to 3 to 4 per cent in 2H from 1H’s 5 per cent as the margin boost from cheaper PKO input fizzled out,” the research arm added.

“Overal l , we expect the segment’s FY18E PBT to surge 154 per cent year over year ( yo-y), although likely down by 5 per cent on a half over half basis in 2H,” they opined.

Al l factors considered, Ken a n ga Res e a r ch is maintaining its ‘ Market Perform’ call on the stock with an unchanged target price of RM25.20 that is pegged to a 22.4- fold average CY28-19E earnings per share of 112.6 sen.

“We deem this fair as its FY19E FFB growth of 8 per cent is in line with the peer average of 9 per cent. While KLK is going to see tepid FFB growth in 2H18, they benefit from the cushioning ef fect of its oleochemical segment.

“KLK’s long- term prospects remain positive as management continues its hunt for M& A targets and its plan to establish a JV refinery in Indonesia,” justified the research arm.