KLK set for higher fresh fruit bunch yields

PETALING JAYA: The easing labour constraint and continuation of mechanisation efforts are expected to drive the growth in fresh fruit bunch (FFB) output for Kuala Lumpur Kepong Bhd (KLK) going into 2023.

This was highlighted by KLK’s management at a recent virtual meeting held by Hong Leong Investment Bank (HLIB) Research.

Other highlights at the meeting included a further increase in the crude palm oil (CPO) production cost for financial year 2023 (FY23), given higher fertiliser costs and the full impact of the minimum wage hike in Malaysia.

However, these will be partly mitigated by the FFB output growth.

The group also expects its manufacturing performance to improve in the fourth quarter of FY22 (4Q22) on relaxation of export curbs in Indonesia, said HLIB Research in its latest report yesterday.

KLK’s management guided that FFB output growth will sustain for the next two to three months on the back of seasonal factors.

“Moving into FY23, we understand that FFB output will grow further albeit gradually and hit an FFB yield of 21.5 tonnes per ha, which will translate to an FFB output of five tonnes.

“This is on the back of easing foreign labour constraints in the Malaysian operations.

“KLK expects to receive about 1,000 foreign workers by end-September and it is also awaiting approval for 2,000 more foreign workers, alongside the continuation of mechanisation efforts,” HLIB Research pointed out.

Meanwhile, KLK’s management has guided that its CPO production cost will increase further to about RM2,000 per tonne in FY22 due to higher fertiliser prices and application.

“The production cost will increase further in FY23,” it added.

KLK’s ex-mill CPO production cost fell by 3% quarter-on-quarter to RM1,940 per tonne, bringing its nine-month FY22 production cost to RM1,900 per tonne due mainly due to a higher FFB output.

In the manufacturing segment, the group expects a better 4Q22.

Recall in 3Q22, HLIB Research had noted that the group’s operating profit contribution from manufacturing segment fell 39% to RM229.1mil.

The group’s improved performance at the oleochemical sub-segment was more than offset by Indonesia’s domestic market obligation or DMO policies and export, which has in turn resulted in losses at refineries and kernel crushing plants.

“We expect the segment’s performance to improve in 4Q22, on the back of the relaxation of export curbs in Indonesia,” added the research house.

Moving into FY23, HLIB Research expects an increasingly challenging operating environment at the oleochemical sub-segment arising from challenging demand prospects and high energy costs, and intensifying competition from Indonesia will likely be partly mitigated by the partial completion of an integrated refinery and oleochemicals complex in East Kalimantan

“This will allow KLK to capture further margins from its nearby plantation operations measuring some 80,000ha,” it noted.

In the property segment, the research house expects earnings contributions to the group will remain stable at about RM15mil to RM20mil on a quarterly basis, supported by property launches in small phases.

HLIB Research has also increased the group’s core net profit forecasts by 1.4% for FY22, 2.1% for FY23 and 2.6% for FY24 as “we raise our FFB yield assumptions closer to management’s guidance”.

It has maintained a “buy” call on the stock with a higher target price of RM27.27 per share from RM26.80 previously. “KLK remains as one of our top picks for the sector, given its decent valuations,” the research house added.

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