12/09/2011 (The Star) -  Kuala Lumpur Kepong Bhd's (KLK) near-term dividend payout could be affected in light of its RM706mil investment in downstream palm oil projects under the Economic Transformation Programme (ETP), according to analysts.

Kenanga Research said in a report yesterday that KLK's dividend payout of 81 sen for the financial year ending Sept 30, 2012 (FY12) might be affected due to the additional capital expenditure (capex) incurred as a result of the investment.

“FY12 (estimated) dividend of 81 sen may be affected as the additional capex of RM286mil is significant as it makes up 86% of the average historical five-year average capex of RM333mil.”

The research house said KLK might lower its current dividend payout ratio to 56% in FY12, making it the lowest payout ratio in five years, from 60% previously.

Kenanga said it expected a 5% reduction in KLK's dividend payout to 77 sen for FY12.

“As FY11 is ending soon, we maintain our expected dividend of 78.5 sen,” the research house said.

An analyst with a local bank-backed brokerage also said he expected KLK's dividend payout to be “mildly affected” next year.

“It should be marginal, maybe just a 5% hit to payout in FY12. High capex drains cash and usually means lower dividends,” he said, adding that he was however upbeat about KLK's investment plans.

Kenanga also said it was “positive” on KLK's expansion plans.

“We reckon KLK should enjoy further cost reduction due to economies of scale as a result of higher production volume. In addition, specialty oleochemical products such as methyl ester sulphonate, fatty alcohol, tocotrienol (a variant of Vitamin E) and isomers usually command higher margins compared with other normal downstream products.”

KLK's investments, which were revealed on Thursday at an ETP progress update, would be spread over three production plants and a research and development centre.

The plants, to be based at Westports in Klang, will each produce methyl ester sulphonate and fatty alcohol; specialty fatty ester; and high-grade tocotrienol and isomers. The research and development centre will be built in Shah Alam.

The bulk of the RM706mil investment will go towards the methyl ester sulphonate and fatty alcohol facility, an integrated plant that will receive RM480mil.

The projects are aimed at moving Malaysia up the palm oil value chain from upstream activities (that is, the cultivation of oil palm and production of palm oil) to downstream, which involves the production of oleo-derivatives that can fetch higher profit margins.