PETALING JAYA: Kuala Lumpur Kepong Bhd’s (KLK) plantation operations are expected to remain challenging, which may translate into higher cost and lower yields.
However, this will be mitigated by the current high selling prices of crude palm oil (CPO), according to UOB Kay Hian Research based on its recent meeting with KLK’s management.
The research house said, in its report, that KLK would have an uphill task given the rising cost and shortage of workers.
“We are hoping for a better year ahead with the recent approval to bring in the 32,000 workers in the middle of this month,” said UOB Kay Hian Research.
The research unit also said higher fertiliser cost due to supply constraints and logistical issues would contribute to a significant increase in cost of production if the productivity yield fails to catch up in the next financial year ending Dec 31, 2022 (FY22).
Fertiliser cost makes up 35% to 40% of the ex-mill cost.
For FY22, KLK has secured about 40% to 50% of its fertiliser, and the purchase cost was 25% to 30% higher than the fertilisers secured earlier.
Meanwhile, UOB Kay Hian Research also believed that the downstream margins might narrow in the next quarter, with the recent increase in CPO and palm kernel oil prices.
“However, this might be partially offset by higher sales volume, especially for the oleochemical division, and cost advantage from the revised export levy in Indonesia for KLK’s Indonesian downstream operations,” said the research house.
It added that the current utilisation rate of KLK’s oleochemical plants is 80% to 85%.
“Sales for the European and North American regions are expected to remain healthy,” said UOB Kay Hian Research, adding that KLK would benefit from the Suez Canal blockage and port congestion in north America with higher local demand.
Also, a recovery of productivity yield in FY22 will marginally mitigate the impact of rising fertiliser cost.
KLK is expected to record fresh fruit bunch (FFB) production growth of 5% to 10% year-on-year (y-o-y) in FY22 on the back of FFB yield recovery from its prime age trees in Malaysia, and higher growth from its Indonesia estates which have younger age profiles.
For FY21, UOB Kay Hian Research had only factored in a 2% y-o-y growth versus KLK’s management’s initial guidance of 10% y-o-y, which the research house reckoned is hard to achieve.
“We would not be surprised if the production growth comes in even lower due to the current labour shortage in Malaysia.
“Assuming KLK achieves a 0% y-o-y growth in FFB production growth for FY21, its earnings would be reduced by 4%.