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Wet Weather Gets The Better Of Kuala Lumpur Kepong
Malaysia Perspective | 07 March 2011
By:

By Joshua Lim

Kuala Lumpur Kepong (KLK) was in the spotlight recently when some RM 491 million was erased from its market capitalisation, as it shares came under selling pressure on February 9, 2011. KLK is a Malaysian multinational company involved in plantation, manufacturing, property development and retailing.

Whilst plantation remains KLK’s core business, the Group has expanded downstream into resource-based manufacturing, in particular oleochemicals and rubber processing. Through Crabtree & Evelyn, a worldwide brand, the Group is involved in the manufacture and retail of personal care products, toiletries, home fragrances and fine foods. Capitalising on the strategic location of its land bank in Malaysia, KLK has also ventured into property development. KLK has a paid-up capital of RM 1.07 billion and is listed on the Main Market of Bursa Malaysia Securities. Its shareholders’ fund currently exceeds RM 5.5 billion.

In its report published on the same day, KLK added that it was not the only company experiencing this phenomenon, as all planters in Malaysia recorded the lowest coverage of fresh fruit bunches (FFB) production during the quarter, ranging from 8% to a maximum of 23% on-year due mainly to the impact of wet weather which affected harvesting activities. However, the management of KLK is confident of hitting its target of 10% growth for FY 2009 -2011.

However, some research houses preferred to be more conservative and have adjusted its FFB yield projections downwards by 0.5 tonnes per ha to between 23 tonnes and 24 tonnes for FY11-13 (from 24 tonnes to 25 tonnes previously), resulting in FFB production growth of 8.5% for FY11, 4.7% for FY12 and 6.3% for FY13. RHB Research added that the bright spot is KLK’s 22,787 ha of rubber plantations, which yielded an operating profit per mature ha of RM6,718/ha (with average price of RM9.80/kg) in FY2009-2010. This figure was not so far off from its CPO division’s figures of RM7,061/ha.

Some Positives For KLK
Not all is lost for KLK. Analysts expect its retail unit to return to the black in 1Q FY2011F (from the RM 8.6 million operating loss in 4Q FY2010), on seasonally strong festive sales in the quarter. The expected turnaround of Crabtree & Evelyn would be led by strong growth in Asia. This includes the completion of its brand positioning exercise that includes a new store design concept.

Another positive is seen in the group’s manufacturing segment. It is expected to remain strong, due to the oleochemicals division, as improved economic sentiment should encourage more restocking activities (despite a challenging business environment). The contribution from last year’s acquisition of Croda’s 150,000 MT Emmerich plant should also improve the segment’s operating profit in 1Q FY2011. However, the adoption of FRS139 (necessitating mark-to-market hedging treatment), could partly offset the significant improvements operationally. Going forward, there is anticipation of merger of the company’s German oleochechemicals units to further streamline operating costs.

Large Land Bank
The company’s matured oil palm area stands at 141,980 ha, while immature area is at 33,960 ha as at end of FY2010. The group’s Indonesian estates are expected to drive plantation earnings going forward, kicking-in gradually as immature areas there only make up some 19% of KLK’s total planted area. The group’s Indonesian estates experienced biological tree stress last year. The lower FFB yields were also dragged down by low productivity of its still young estates in Kalimantan and below-par FFB yields at PTPN2’s North Sumatra estates. Results of on-going replanting and rehabilitation work in the North Sumatra estates, would take some time to materialize. This year yield recovery is expected and maiden FFB harvests at maturing estates in Indonesia should contribute to the 10% Y-o-Y overall FFB volume growth. Approximately 70% of the group’s planted areas in Indonesia are young and prime. It is also expected that CPO and rubber prices will remain relatively strong in 2Q FY2011F, as La Nina-driven rain that flooded most of the northern part of Peninsular Malaysia recently may have partially disrupted harvesting activities.

On the local front, the conversion of plantation land to property land bank is expected in certain locations. One such area is Bandar Seri Coalfields, a new 405 ha (1,001 acres) township development in Sungai Buloh. It is understood that earthworks for phase 1 (RM 350 million GDV) has been completed, and initial launch is scheduled for mid- 2011. The project will comprise over 900 units of terraced houses, semi-detached houses, and shop offices.

However, property contribution remains minimal at this juncture. The group has around 6,000 acres of plantation land in the vicinity of Sungai Buloh, which has been earmarked as the transportation hub – with plans to construct an MRT terminal station there. While the area is promising for property development, it would take at least several years before any substantial development is realised here.

Valuations
KLK’s forecast earnings have been updated after incorporating updates on the plantation sector. This includes lower costs structure on lower external FFB processed, but the impact is partially offset by downward adjustments to PTPN2 estate volumes. Consequently, the TP is nudged up to RM22.80 (DCF: WACC 9.1%, Rf 5%, Rm 10%, B 0.9x, TG 3%), implying 21x FY11F EPS. KLK remains a HOLD because of limited upside from current levels, as it is believed that the 7.3% earnings CAGR until FY-2013F has been priced in.


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