KL Kepong eyes Indonesian palm oil refineries for growth
Worker load palm fruits onto a truck at a plantation in the Luwu district of Indonesia's South Sulawesi province August 11, 2009. — Reuters picKUALA LUMPUR, March 2 — Malaysia’s No.3 palm oil firm, KL Kepong, will build three refineries in Indonesia to tap higher margins after Jakarta lowered its processed edible oil export taxes, a senior company official said today.
With 56 per cent of KL Kepong’s 248,498 hectares of total landbank in Indonesia, the firm has “little choice” but to build refineries there to enhance the value of its crude palm oil from these estates, the firm’s plantations director, Roy Lim, said.
“Indonesian refined materials are available at sometimes a US$15 (RM45)-US$25 a tonne discount to what is being offered by Malaysian refineries in their endeavour to take advantage of the margins and to capture markets,” Lim told Reuters in an interview ahead of the Bursa Malaysia Palm Oil Conference.
Planters, refiners and bankers gather for the palm oil conference from Monday to Wednesday as the market for the tropical oil grows this year at the expense of soyoil, with the South American soy crop damaged by drought.
Indonesian refiners have been offering discounts and taking business away from Malaysian competitors, with last year’s cut in processed palm oil export taxes and high supply boosting margins.
Top producer Indonesia’s moves turned margins negative for Malaysia where KL Kepong has two palm oil refineries.
Traders and analysts say the key beneficiaries of Jakarta’s export tax change include Singapore-listed Wilmar and First Resources that own extensive landbanks and refineries in the world’s top palm oil producer.
Shares in KL Kepong barely moved today, underperforming the broader market that rose 0.8 per cent.
Young oil palms, limited land bank
KL Kepong has a market capitalisation of RM25.15 billion. Some analysts say it is a favoured stock pick compared to its larger Malaysian rivals Sime Darby and IOI Corp thanks to its younger plantation age profile.
Credit Suisse said in a recent note some 21 per cent of the firm’s estates are immature while 28 per cent are young and 42 per cent are a prime age.
That suggests KL Kepong’s estates can withstand and profit from erratic weather, which has a worse impact on older oil palms and boosts palm oil prices.
“Our earnings growth in the next few years will be driven by the harvest from our immature areas and the rising yields of our young areas,” Lim said.
KL Kepong’s plantation division contributes almost 80 per cent of the firm’s net profit, which rose more than 12 per cent to RM341 in the first quarter.
But some analysts warn that KL Kepong’s future growth may be hit if the firm does not expand its land bank.
“We still have plantable reserves of about 20,000 hectares and are actively exploring opportunities to expand our land bank, Lim said.
Analysts say KL Kepong is highly sensitive to palm oil prices, with every RM100 per tonne rise adding about five per cent to its net profits.
Lim said the firm was optimistic about the palm oil market which has gone up by more than 6 per cent in February.
Bursa Malaysia palm oil futures have been driven by the South American drought’s impact on soy harvests and a lower rapeseed crop in India, the world’s largest palm oil buyer.
Palm oil prices dropped 0.7 per cent today as traders booked profit on the recent rally.
“High petroleum prices would also support biodiesel usage which is increasing in South America. Prices should, therefore, find support at 3,000 ringgit per tonne,” Lim said. — Reuters
