CPO Upswing Bodes Well for Kulim

PETALING JAYA: Analysts are generally bullish on the plantation sector with crude palm oil (CPO) prices targeted to hit RM3,000 per tonne by the end of the first quarter. CPO is currently hovering around RM2,600 per tonne.

An analyst with a local brokerage said Kulim Bhd should benefit from an upswing in the CPO price.
He said being a Roundtable on Sustainable Palm Oil (RSPO)-certified producer, Kulim could expect to price its product US$40 to US$50 per tonne higher (over its non-RSPO rivals) in Europe.

“Moreover, Kulim has a strong and resilient earnings base due to its diversification,” he said, adding that the company could stand to benefit from a 10% to 15% lower fertiliser cost this year, compared with 2009.
“This should translate to a decline in operating costs to an estimated RM900 to RM1,000 per tonne,” he noted.

An analyst with a local brokerage said Kulim’s operating cost per tonne was expected to fall in the financial year ending Dec 31 (FY10) on the back of an increase in palm oil production and lower fertiliser costs.

The brokerage has a “hold” call on the stock with a lower revised net asset value of RM7.85 per share.

“Our fair value assumes a FY10 price/earnings of 12 times on plantation earnings. We have reduced FY09 and FY10 earnings estimates by 23% to 29% to account for a higher effective tax rate and minority interest as a result of the consolidation of (associate company) KFC Holdings (M) Bhd’s profits,” the analyst noted.

The analyst said the broking house expected fresh fruit bunches (FFB) yields at Kulim’s Papua New Guinea (PNG) division to soften in FY10 after a bumper harvest in FY08 and FY09, assuming the PNG division would achieve an FFB yield of 24.5 tonnes per hectare in FY10 versus 25 tonnes in FY09.

On palm oil output, the analyst said in Malaysia it had not been as fruitful in FY09 due to a combination of factors such as heavy rain and tree stress. “We expect the FFB yield to remain flat at 23.9 tonnes per hectare in FY10,” he said.

On Kulim’s manufacturing division, he said it was expected to turn around in FY10 underpinned by improving oleochemical demand and an earnings break-even at its biodiesel operations.

“The utilisation rate of Kulim’s oleochemical plants is currently 94% while biodiesel should benefit from secured sales of 42,000 tonnes to Europe for the six months starting this month,” he said.

On Kulim’s immediate plans, he said the company was expected to focus on new plantings in PNG and the expansion of KFC outlets in India.
“Kulim is also expected to complete the 200,000-tonne-per-year refinery in Liverpool (Britain) by April 2010, with a capital expenditure of RM550mil to RM600mil.

“Assuming a refining margin of RM80 per tonne and utilisation rate of 100%, we believe its refinery in Liverpool would generate RM16mil,” he said, adding that the refinery would only operate at an average utilisation rate of 20% in its first year of operations.

“As such, we expect refining income to be only RM3mil in FY10, while feedstock for the refinery would come from Kulim’s operations in PNG,” the analyst said.

However, he said, an area of concern for Kulim would be the increasing number of related-party transactions (RPTs) within the Johor Corp group of companies.

“We do not dismiss the possibility of more RPTs or restructuring within the group. A persistent rumour is the privatisation of KFC Holdings by QSR Brands Bhd though the management has denied it,” he said.

When contacted by StarBiz, Kulim managing director Ahamad Mohamad said that being a member of the Johor Corp group increased the chances of Kulim entering into RPTs.

“Nonetheless, we will observe diligently all the requirements by the various authorities with regard to any transactions entered into. We will also diligently observe the transactions entered are in the best interests of our shareholders,” said Ahamad.

On the company’s performance, he said since many observers expected an increase in the CPO price, “Kulim anticipates better performance compared with 2009, especially the plantation operations in Malaysia, PNG and Solomon Islands, provided no negative surprise on input costs.”

He also expects “some savings in fertiliser cost compared with 2009.”

Ahamad said it was the company’s practice to lock in the price of its fertiliser requirements before the start of each calendar year to minimise the risk of cost fluctuation.

“Based on the prices locked in for 2010, we expect some savings in fertiliser cost compared with 2009,” he noted.

Source : The Star by Danny Yap

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