14/7/06 (The Star)  -  PETALING JAYA: Kuala Lumpur Kepong Bhd’s (KL Kepong) profitability is expected to be driven by its plantation division due to improvements in yields, high rubber prices and increase in palm oil production. 

Oil palm. A research report by AmResearch Sdn Bhd said fresh fruit bunch (FFB) yields and oil extraction rates were expected to improve in financial year 2007 (FY07). This is expected to result in a rise in FFB production by 10% to 2.6 million tonnes for FY07. 

“Enhancements in margins should be supported by higher crude palm oil (CPO) prices, larger economies of scale and stabilisation of fertiliser costs,” said the report. 

AmResearch also said KL Kepong would benefit from better FFB yields in Indonesia, led by more productive trees in that country. “We understand that FFB yields in Indonesia are as good as those in Sabah. 

“This is because the soil in Indonesia is the first generation soil, meaning that it is planted with oil palm for the first time,” it said.  

This is in contrast to some of the plantation land in Malaysia, which has been planted with oil palm a few times and resulted in depletion of nutrients. 

AmResearch also said FFB yields of KL Kepong’s Indonesian trees ranged between 22 and 24 tonnes per ha. But, for the group, average FFB yield was 23 tonnes per ha due to lower yields in Malaysia, mainly due to young trees planted in Johor. 

The report said plantation operating costs in Indonesia were higher in the early stages but should be lower later on. “We understand that when oil palm trees are young, operating costs per tonne in Indonesia are either lower or the same as Malaysia. This is due to higher infrastructure costs in Indonesia.” 

AmResearch said, however, that when the trees were prime, then operating costs in Indonesia were likely to be lower than that in Malaysia. 

One of the components of cost, which is more attractive in Indonesia than Malaysia, is labour. The monthly salary for a harvester in Indonesia is RM600 to RM800 versus RM1,000 in Malaysia.

Although KL Kepong has not ventured into the production of biodiesel, it would still reap benefits from the effects of increased interest in biodiesel on CPO prices.

Without biodiesel, CPO prices would have been much lower, it said, because of the country’s excessive palm oil stock levels. 

The report said earnings risk was expected to come from the oleochemical division as profits could be affected by start-up losses from the new fatty alcohol plant in Klang and potentially small losses in KL Kepong’s fatty acids plant in Jiangsu Province, China. The management expects the Chinese plant to churn in profits by year-end and is currently operating at full capacity.

But the management believes that the downturn in the oleochemical cycle should be bottoming out soon.

However, AmResearch differed with the management view, as it believed that most oleochemical companies would be competing on pricing and it would be difficult for selling prices to rebound. “We think that KL Kepong’s expansion into fatty alcohol is due to the need to improve oleochemical margins,” it said.

Rubber. The report said KLK should benefit from high rubber prices due to robust demand from China’s automobile industry, shortage of supply and high synthetic rubber prices which were a result of rising crude oil prices. 

KL Kepong has the highest hectarage of land bank of rubber trees – 20,000ha – compared with other plantation companies in the last financial year. 

“China’s automobile industry is expected to be driven by a booming population and replacement market while shortage of supply is likely due to the political unrest in southern Thailand,” it said.

Crabtree & Evelyn. On KL Kepong’s retailing division, the house said it understood that the management did not plan to sell Crabtree & Evelyn at the moment. “In spite of difficult operating conditions, there are no plans to sell because the management believes that there is good value in this unit,” said the report. 

Initiatives to improve its profitability include improving its brand name and increasing the number of stores. 

“We understand that Crabtree & Evelyn may be looking into China as it does not have any presence there yet. Crabtree & Evelyn is also considering e-commerce or Internet selling to improve sales,” said AmResearch.