Research house says CPO production may go up

THINGS are not looking great for Malaysian plantation players, with rising cost and no strong catalysts to boost crude palm oil (CPO) prices.

Palm oil stocks have begun to rise after five months of declines, while exports fell in June on weaker demand from key markets.

Besides these factors, the severe labour shortage situation in the palm oil industry continues to persist.

Under these conditions, there isn’t much optimism about plantation players’ earnings for the second quarter of the year, following an overall lacklustre performance in the first quarter.

Plantation companies, especially those with higher exposure in Peninsular Malaysia and Sabah, are expected to register weaker quarter-on-quarter (q-o-q) as well as year-on-year results in the upcoming results season due to lower CPO production and weaker average selling prices during the second quarter of the year.

Based on production data, Sabah saw the largest q-o-q decrease in CPO production during the recent quarter, while Sarawak reported a q-o-q increase in production.

UOB Kay Hian Research says plantation companies with the highest exposure to Sabah include Genting Plantations Bhd, IJM Plantations Bhd and IOI Corp Bhd, while Sarawak Oil Palms Bhd and TH Plantations Bhd have higher exposure to Sarawak and may report higher q-o-q earnings.

CPO production, however, is largely expected to increase in the coming quarters, as long as weather conditions remain favourable, adding to the supply of palm oil in the market.

The projected increase in stockpile, however, will weigh on already-soft CPO prices.

While IOI Corp has seen about a 3% increase in its share price, almost all other players have recorded declines year-to-date.

The increase in IOI Corp’s share price is supported by improved earnings from its downstream operations and special dividend following the recent disposal of 70% of its equity interest in Loders Croklaan Group.

IJM Plantations recorded among the biggest declines in its year-todate share price, down about 18%, likely due to its poor financial results.

Other players generally recorded declines in their share prices, with IJM Plantations down 20%, Genting Plantations about 10% lower and Sime Darby Plantation Bhd, FGV Holdings Bhd and Kuala Lumpur Kepong Bhd down by about 11%, 9% and 1%, respectively.

Having said that, it may not be all gloom and doom for the sector.

The research house says the low-but-stable CPO prices will benefit integrated planters like IOI Corp and PPB Group Bhd due to lower input costs.

It adds that Genting Plantations, with its new refinery and above-average fresh fruit bunch (FFB) growth, is also likely to benefit from rising production trends.

Affin Hwang Capital Research is positive on FGV Holdings and Genting Plantations.

“We believe FGV’s earnings will grow going forward on the back of higher FFB and CPO production, as well as a better contribution from the sugar business.

“Also, we like FGV as management is more focused on improving the core business, improving operational excellence and optimising financial and human capital,” it says.

For Genting Plantations, the research house expects higher FFB and CPO production, coupled with an increase in contribution from the downstream plantation segment, to drive earnings growth.

On the political front, there is optimism that the palm oil industry could benefit from the trade war between the United States and China.

China’s imposition of 25% tariffs on US soybean imports on July 6 will result in higher prices for soy- bean and soy-related products into China.

The higher prices are likely to result in weaker demand for the vegetable oil, leading to lower crushing activities and indirectly benefiting palm oil as a cheaper alternative edible oil.

Last year, Malaysia’s exports of agri-commodities and agri-commodity-based products to China rose 27% to RM19.1bil compared with RM15bil in 2016.

China is the second-largest export market for Malaysian palm oil after India.

Another positive factor for the commodity is the limited downside for CPO prices, due to the base support from firm crude oil prices currently hovering above US$70 per barrel.

India’s recent hike in import duties for other edible oils is also seen as positive for demand for palm oil into the country, as it restores the commodity’s competitiveness following the earlier hike in import tax on crude and refined palm oil imposed in March 2018.