KLK to gain from lower fertiliser prices

HLIB Research expects production cost to continue to trend downwards in FY24 mainly due to lower fertiliser prices.

PETALING JAYA: Kuala Lumpur Kepong Bhd’s (KLK) crude palm oil (CPO) production cost will likely have peaked in the third quarter of financial year 2023 (3Q23) as seasonally higher 4Q23 fresh fruit bunch (FFB) production will bring unit production cost lower, says Hong Leong Investment Bank (HLIB) Research.

Based on a recent virtual meeting with KLK, the research house expects production cost to continue to trend downwards in FY24 mainly due to lower fertiliser prices.

However, it is premature to ascertain the potential palm productivity loss from El Nino, according to the research house.

Given the low production growth clocked in so far, HLIB Research said KLK’s’ management lowered its FY23 production growth guidance to 6% at 5.3 million tonnes for FY23.

“We understand that the impending El Nino has yet to affect KLK’s productivity as its estates are still receiving adequate rainfall although the weather has been drier than last year,” it added.

In 3Q23, KLK’s CPO production cost increased to RM2,700 per tonne from RM1,940 per tonne in 3Q22 due to the minimum wage hike in the country and higher fertiliser and diesel prices.

This brought nine-month financial year 2023 (9M23) CPO production cost to RM2,400 per tonne from RM2,000 per tonne in 9M22.

Other highlights from the meeting included the near-term challenges for the manufacturing segment on the back of weak demand prospects in Europe and property segment to remain stable.

According to HLIB Research, the near term challenges for the group’s manufacturing segment remains.

KLK’s manufacturing segment turned red with an operating loss of RM33.3mil in 3Q23 and the losses were caused by high energy costs and weak demand from Europe.

“While the management’s aggressive restructuring plan to contain losses in Europe and slight improvement in China market will likely result in a better performance from 4Q23, we believe further improvement will take a while, as demand from Europe will remain weak in the coming quarters,” HLIB Research said.

Meanwhile, the group’s property development segment will remain stable with earnings contribution of RM15mil to RM20mil in a quarter, supported by property launches in small phases.

“All in, we maintain our earnings forecasts, sum-of-parts target price of RM22.68 and a ‘hold’ rating on KLK,” HLIB Research added.

It liked KLK for its sustainability commitments, decent balance sheet with a net gearing of 0.4 times as of June 30 and decent FFB production growth.

However, further capital upside would be capped by potential earnings dilution from its recent proposed acquisition, said the research house.

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