The issue which relates to the PT198 estate it managed in 2010 has been resolved as KLK strengthened its internal processes after being made aware the abuses of the workers by the contractor it hired. But this news may still have some negative impact on the group's corporate image. Overall, we are negative and maintain our Underperform call due to its rich valuations. Our target price is based on SOP. 

According to the Bloomberg article, former workers at the PT198 plantation near Berau in Indonesia revealed that they were defrauded, abused and held captive by representatives of a labour management firm called CV Sinar Kalimantan in 2010. The estate belongs to Batu Kawan but is managed by KL Kepong. In Nov 2010, after Rainforest Action Network (RAN) reported the abuses at PT 198, representatives of KLK met the workers and apologised to them for their treatment, saying that they were unaware of the abuses. KLK's CEO said that the company has cancelled the contract of CV Sinar and blacklisted the contractor. It was also reported that in March 2013, workers at PT 198 staged a protest against what they said was unfair wage reduction. 

This news is negative for KLK as it could hurt its corporate image. The good news is that KLK took action against the contractor when it became aware of the abuses and has since strengthened its internal procedures when selecting its contractors. We also gathered that the case has been resolved and the group's downstream division has been engaging with its customers and has spelt out to them the actions taken to prevent future such incidences. This also reveals the emerging operating challenges for plantation companies in Indonesia which subcontract part of their operations. 

We do not recommend exposure to KLK given its pricey valuations relative to peers.

Source: CIMB Daybreak - 22 July 2013, Full PDF Report