Planters to see earnings in line from coming quarter

KUCHING: RHB Investment Bank Bhd (RHB Research) expect to see mostly in-line earnings for plantations firms this coming quarter, with two players that could book better-than-estimated results, and one that could come in below projections.

Also, it believed earnings trends between the Malaysian and Indonesian planters could vary in the fourth quarter of 2022 (4Q22), due to the change in tax structure in Indonesia in mid-Nov 2022.

“4Q22 earnings to drop QoQ for Malaysian planters, and be flattish for Indonesian players,” it said in its sector analusis.

“In Malaysia, fresh fruit bunch (FFB) output for the companies under our coverage fell by an average of 0.5 per cent quarter on quarter (q-o-q) in 4Q22, while spot CPO prices decreased by one per cent q-o-q – which would translate to slightly lower quarterly earnings.

“In Indonesia, we estimate 4Q FFB output also fell by circa 14 per cent q-o-qQ, based on the trend in 3Q. However, CPO prices net of taxes rose 11.6 per cent q-oq (due to the impact of the levyfree period until mid-Nov 2022), which could translate to flattish quarterly earnings.”

On a yearly basis, the earnings trend may also be different for Malaysian and Indonesian planters. For the Malaysian planters, although average FFB output rose five per cent year on year (y-o-y) in 4Q22, spot crude palm oil (CPO) prices dropped 24 per cent y-o-y.

In Indonesia, RHB Research saw that FFB output rose about 11.6 per cent y-o-y in 4Q22, while net CPO prices were relatively flat y-o-y due to the change in tax structure.

“We may see Malaysian planters post weaker YoY earnings while Indonesian planters post stronger YoY earnings in 4Q22,” it added. “As CPO price has a greater effect on earnings than output growth, each company’s forward selling policies would also affect its earnings outlook.

“As such, planters like Kuala Lumpur Kepong Bhd (KLK), IOI Corporation Bhd (IOI), Sime Darby Plantation Bhd and FGV Holdings Bhd (FGV) that undertook more aggressive forward selling activities should be able to recognise better CPO prices than their peers in 4Q22.

“Spot CPO prices in 4Q22 were flattish q-o-q at RM3,931 per tonne, but fell 24 per cent y-o-y. For 2022, spot CPO prices averaged RM5,136 per tonne. For 1Q23, given the 26 per cent y-o-y decline in spot CPO prices so far, planters may likely see another yearly drop in quarterly earnings.

“4Q22 likely to bring mostly in-line earnings for most players, based on our estimates of production output alone. Two may outperform forecasts based on FFB output (KLK and FGV), while one could post disappointing numbers due to weak FFB output (IOI).”

“Nevertheless, as it is only the 1HFY23 for IOI, there could be a turnaround in output trends in the later quarters.”

For those with downstream operations in Indonesia, RHB Research expect margins to improve in 4Q22 as the tax levy holiday ended in mid-November.

“As such, the tax differential between upstream and downstream products should widen, resulting in better downstream margins. However, Malaysian downstream counterparts should see narrower quarterly margins with the reinstatement of the levy, as stiff competition resumes from Indonesia.

“We still like the integrated players like KLK, IOI and Wilmar, but also see value in counters like Sarawak Oil Palms Bhd, Bumitama Agri and Golden Agri.”