This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017
Planters have had a rough couple of years as an abundant supply of oilseeds and uncertainty in the economic landscape dragged down crude palm oil prices. It was only late last year that CPO prices started to show some signs of recovery.
Nevertheless, Kuala Lumpur Kepong Bhd (KLK) achieved commendable results for shareholders as its return on equity over three years grew from 13% in FY2013 to 16% in FY2016. That gives it a weighted and graduated ROE of nearly 14% over the three-year period, ahead of all its peers, based on The Edge Billion Ringgit Club calculations.
KLK’s net profit also increased from RM917.74 million in FY2013 to RM1.59 billion in FY2016. In FY2016, net profit increased 83% from the previous year. The company explained that this was largely due to exceptional gains from the sale of estate land and net deferred tax credits from the revaluation of its Indonesian assets. Without the one-off gains, net profit for FY2016 would have increased by 3% year on year to RM892.6 million.
KLK derives the bulk of its revenue from its plantation and oleochemicals divisions, accounting for 50.6% and 46.9% respectively. The rest comes from its property development, investment income and rubber plantation operations.
As at Sept 30 last year, 14% of its palm trees were immature, 28% were four to nine years old, 34% were 10 to 18 years old and 24% were above 19 years old.
According to KLK’s 2016 annual report, there were no significant changes in the productive areas as there were no new acquisitions and plantings in the remaining plantable reserves in Indonesia.
It adds that the progress in Liberia, which accounts for 4% of its total oil palm plantable area of 205,472ha, is slow as it is still awaiting the resolution of several land issues and completion of studies using the high carbon stock approach methodology, on top of the social impact exercise with local communities.
“As such, the immature areas have declined slightly with no massive new plantings, while the older palms have increased marginally with impending large-scale replanting in Sabah (Lahad Datu region) and Indonesia (Belitung Island region) in the coming few years,” says KLK.
The company’s financial performance for the first half of the year was within analysts’ expectations. Its plantation division saw operating profit double y-o-y to RM786 million on higher CPO prices and better fresh fruit bunch (FFB) production.
In contrast, its manufacturing division, which produces oleochemicals, saw its operating profit fall 56% y-o-y to RM106 million as margins narrowed to 2.1% during the period due to higher crude palm kernel oil prices.
However, CPO prices have lost some of their shine of late. Since the beginning of the year, they have fallen about 17% from RM3,218 to RM2,672 per tonne as at July 31.
The challenge for KLK now is to continue the momentum for the second half of the year, when production of FFB in Indonesia and Malaysia are expected to recover and weakness in CPO prices are expected.
Public Bank Research says in a May 23 report that KLK’s management expects to see continuous positive results from the plantation segment in 2H2017 as it has locked in some forward sales. As for its oleochemicals segment, it is anticipated to recover in the following quarters as raw material prices become more favourable.
KLK says it will continue to increase productivity and yield, and improve its oil extraction rates going forward. “For the oleochemicals division, we will continue to optimise the integrated value chain while driving further improvement efficiencies and productivity.”
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