HLIB Research notes that the recent heavy rainfall had minimal impact on the company’s output in its Malaysian operations.
PETALING JAYA: Kuala Lumpur Kepong Bhd
(KLK) expects its fresh fruit bunches (FFB) output to hit 5.9 million tonnes for the financial year ending September 30, 2023 (FY23).
This would represent a robust growth of 18% year-on-year (y-o-y).
The conglomerate’s expectations of higher FFB output on the anticipated recovery in FFB, yield arising from further easing of labour shortage in Malaysia and continued mechanisation efforts, said Hong Leong Investment Bank (HLIB) Research.
The brokerage, which attended a virtual meeting with KLK recently, also noted that recent heavy rainfall had minimal impact on the company’s output in its Malaysian operations.
HLIB Research raised its sum-of-parts-based target price for KLK to RM26.69 from RM26.27 previously, while reiterating its “buy” call on the counter.
“KLK remains as one of our top picks for plantation sector exposure, given its diversified earnings base, healthy balance sheet with a net debt of 0.42 times as at Dec 31, 2022, and decent valuation,” the brokerage explained.
It said KLK guided that crude palm oil (CPO) production cost in FY23 would come in higher at around RM2,000 per tonne, as compared to RM1,900 per tonne in FY22, as the anticipated FFB output recovery would be more than offset by the carryover of fertiliser acquired at significantly higher prices in mid-FY22 and the full impact of minimum wage hike in Malaysia.
“Management shared that lower fertiliser prices would only be reflected in its CPO production cost in FY24,” HLIB Research said.
It added that KLK would revert to its replanting target of around 10,000 ha per annum from FY23, from around 6,000 ha in FY22, as the company had deferred replanting at some fields to take advantage of the high prevailing palm prices.
Meanwhile, KLK remained cautious on the prospects of its manufacturing segment (particularly over the next six to nine months), despite the segment having registered decent performance in the first quarter of FY23, with an operating profit of RM277.5mil.
HLIB Research said this was due to recessionary fears, which would continue to affect demand for KLK’s oleochemical products in all of its operating countries, while the anticipated demand recovery from China had yet to materialise.
Separately, KLK’s glove losses were expected to remain insignificant.
HLIB Research noted KLK had commenced commissioning its third glove production line since March 2023.
Given the challenging operating environment, as a result of escalated energy costs, higher minimum wage and stiff competition, HLIB Research said KLK’s output at glove manufacturing sub-segment would likely remain low.
This would help cap losses at the sub-segment, the brokerage noted.
