24/05/2011 (Borneo Post) - Kuala Lumpur Kepong Bhd (KLK) will continue to be on the lookout for buyers for its non-core businesses, which include its parquet, soap, nutraceuticals and rubber gloves operations, although the group admitted that it is not easy to find buyers at the ‘right’ place.

This was announced on the back of the group’s recent sale of its remaining 40 per cent stake in cocoa processor Barry Callebaut Malaysia Sdn Bhd (BCM) to Luijckx BV (a member of the Barry Callebaut group of companies) for cash of RM117.69 million.

“We understand this will result in a net gain on sale for KLK of RM40 million to RM50 million, which will likely only be recognised in the third quarter ended September 2011 (3QFY09/11),” said RHB Research Institute Sdn Bhd (RHB Research) analyst Hoe Lee Leng in a recent research note.

“As for the impact of the sale on KLK’s profits, we estimate minimal impact of less than minus one per cent per annum.”

In 2QFY09/11, KLK recorded a 5.8 per cent yearon- year (y-o-y) increase in fresh fruit bunch (FFB) production, a significant improvement from the minus 10.4 per cent decline in production experienced in 1QFY09/11 which was caused by the extreme wet weather conditions.

As such, KLK’s 7MFY09/11 production is now down by a slight 0.5 per cent y-o-y. On a month-on-month (mom) basis, production had been improving in leaps and bounds, with April’s production being 20.7 per cent higher y-o-y, up from minus 8.4 per cent y-o-y in January 2011.

“Although we are of the view that production growth should be better from the second half onwards, we prefer to be bit more conservative and are thus cutting our FFB yield projections to reflect FFB production growth of 5.3 per cent for this year from 8.4 per cent previously,” said Hoe.

Moving forward, KLK maintained its view that the strength of crude palm oil (CPO) prices in the first three months of the year was only partially supported by fundamentals, given the increasing financial demand in the commodity market.

While it believed priced would average at RM3,000 to RM3,300 per tonne for the year, it expected to see some price weakness in the next few months, with prices potentially weakening to as low as RM2,800 to RM3,000 per tonne.

“KLK has, we believe, locked in some forward sales already, selling as much as 12 to 18 months ahead, at relatively high prices of RM3,600 to RM3,700 per tonne, but no quantum was revealed. Management stated that it is not too easy to sell forward now given that buyers are a bit more bearish in the current environment,” explained Hoe.

The research firm, however, remained comfortable with its CPO price assumptions of RM3,200 per tonne for the year, RM2,900 for next year and RM2,700 for 2013.

As for rubber, the group expected rubber prices to remain strong at above RM10 per kilogramme (kg) in the medium term, expecting average prices for this year to be around RM13 per kg.

“We understand that KLK is actively replanting its older trees in Peninsular Malaysia as well as replacing some of its low-yielding rubber area in North Sumatra with palm oil,” said Hoe.

Currently, approximately 16 per cent of its rubber trees are aged above 21 years, while approximately 6,550 hectare of its 21,525 hectare of rubber plantation land is situated in Indonesia.

“To take this into account, we are revising our yield projections down slightly to RM1,200 to RM1,250 per kg for FY11-13, which would mean yields would remain relatively flat from last year’s levels of RM1,233 per kg.”

Among the risks that should brought into consideration were a possible convincing reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trends as well as weather abnormalities result in an over or under supply of vegetable oils and the revision in global biofuel mandates and trans-fat policies.

Based on the given factors, RHB Research pegged KLK’s target price at RM22.85 per share.