17/12/2008 (The Star Online) - The current regime of low palm oil prices presents a challenge to oil palm players. Kuala Lumpur Kepong Bhd group plantations director Roy Lim Kiam Chye says it is reviewing its budgets to tighten both capital and operational expenditures to conserve cash.

WHAT are your views on the challenges ahead for the local oil palm plantation players in 2009?

Just like a high tide lifting all boats big or small, very high palm oil prices lifted all companies to profitability, even the inefficient ones. However, under the current regime of low palm oil prices, the primary challenge lies in increasing efficiency and productivity.

Going forward, lower revenue generation would challenge oil palm players to carefully manage their working capital and development expenditures for new plantings. Ambitions for expansion would have to be reviewed against their cash position and the ability to raise funds in a contracting credit market, and expansion is likely to be the domain of those with stronger balance sheets.

The reduction of the persistent high crude palm oil (CPO) stocks by stepping up exports is indeed another major challenge.

The weak global economy would reduce demand and financial instability increase counter party risks as evidenced by defaults in contractual obligations.

Mounting stocks have to be countered by an aggressive replanting policy and a speedy implementation of a bio-fuel policy to provide a safety net for the industry.

What are the immediate and long-term strategic measures taken by the group to counter the sharp drop in CPO prices?

The group has pre-empted the sharp decline in CPO prices by partial forward sales up to more than one year forward for a decent quantity of its estimated production and currently sits on a reasonably healthy position for our financial year 2008/09.

That notwithstanding, budgets are being reviewed to tighten both capital and operational expenditures to conserve cash and to increase efficiency.

Non-urgent projects would be deferred and the fertiliser programme reviewed in terms of dosage and frequency of applications to mitigate the slow decline in the price of fertilisers.

Given the group’s healthy cash position at RM1bil, do you foresee opportunities to buy existing plantations land or greenfields at cheaper value given the depressed CPO price?

We certainly do, although we expect existing mature and well-run plantations to ride out the low prices as they would have built reserves during the high commodity prices unless they are being pressured by a highly geared position.

Owners of greenfields or partially planted ones are more vulnerable if they rely heavily on external finance to fund development expenditure. Tightening credit and the rising cost of funds may cause them to exit, especially those whose core businesses are in other sectors. KLK’s strategy to grow its plantations in Indonesia remains intact, except that the group would be more selective in its choice and conservative in its valuations.

Only good properties with ideal locations or those nearby to its current area of operations would be considered.

What are the major areas that KLK will look at to enhance its oil palm assets?

The group would continue with the policy of replanting with tissue culture materials or the latest home grown DxP material, depending on the suitability of the area, to increase future productivity of fresh fruit bunches and oil yields.

KLK would work towards achieving the production of sustainable palm oil through best practices and also upgrade some of its older palm oil mills to achieve greater efficiency.

Where suitable, the group would implement clean development mechanism projects at palm oil mills and, where feasible, integrate it with further value added downstream activities using the surplus power generated.

To mitigate the current tough trading conditions, the group will further enhance the synergy between its plantations and its refineries as well as oleo chemical plants locally and overseas to create value in the supply chain and to minimise overall group risk.

Does KLK plan to do a share buyback in 2009, similar to parent company Batu Kawan’s move which started a share buyback exercise in mid-July?

Share buyback is always a possibility if the share price is at a level that enhances value to KLK shareholders.

Prudence would always be exercised, taking into account the overall financial needs of the company.