Movement control may cost plantations RM1.6b
Potential loss in crude palm oil supply of 708,500 tonnes projected: Analyst
PETALING JAYA: The potential revenue loss for the plantation industry could amount to RM1.6 billion or more if all palm oil estates and mills cease operation for 14 days, according to CGS-CIMB Research.
This comes as a potential loss in crude palm oil (CPO) supply of around 708,500 tonnes is projected, which could cut the current stockpile estimate for end-March to around one million tonnes from 1.68 million tonnes previously.
Currently the Malaysian Palm Oil Association (MPOA) is appealing for planters to be allowed to work during the partial lockdown. However, no decision has been made by the National Security Council on this matter.
With that , MPOA is of the view that plantation companies will have to adhere to the government directive to cease operations although it will continue to pursue the appeal.
“Assuming MPOA’s appeal to the government is unsuccessful and all planters need to comply with the restricted movement order period and cease operations at their Malaysian estates, we forecast a loss of two weeks of productivity in 2020 and a reduction in fresh fruit bunch output by around 4% for FY20 for Malaysian planters’ estates in Malaysia,“said the research house.
It said the earnings of upstream palm oil producers with more than 90% of their estates in Malaysia (FGV Holdings Bhd, Ta Ann Holdings Bhd, Hap Seng Plantations Holdings Bhd, IOI Corp Bhd) are likely to be hardest hit by this directive as estate costs are mostly fixed and the loss in revenue will mostly flow through to earnings.
“Integrated palm oil producers (those with majority-owned refineries and Indonesian estates) like Kuala Lumpur Kepong Bhd (KLK), Wilmar International Limited and Genting Plantations Bhd, will be partially cushioned as they could benefit from better CPO prices for their Indonesian estates given lower-than-expected supply from Malaysia.”
On the bright side, a spike in CPO price is likely to happen given the tighter-thanexpected supply, but will benefit other palm oil producing nations like Indonesia and Thailand.
“This is likely to negatively impact cash flows of planters and millers as well as result in potential undeliverable commitments if planters sold forward their crops.”
CGS-CIMB ran a quick sensitivity analysis on the plantation companies under its coverage including Wilmar, and found that the potential negative impact on its forecasts for net profit from estate operations (excluding milling activities) could range from RM10 million to RM63 million.
This could also tilt FGV into a loss of RM3 million from its current estimate for the company to return to profit in 2020.
Hap Seng and Ta Ann are likely to be the second and third worst-hit among its coverage as it estimates the disruption could reduce their earnings forecasts by 30% and 14%, respectively.
“Our preliminary estimate reveals the potential negative earnings impact on IOI, KLK, Genting Planations and Wilmar to be 6%, 4%, 7% and 0.7% respectively, if the appeal for planters to continue work at estates during the next two weeks is unsuccessful. We are keeping our earnings forecasts and target prices for now pending clarification from the government and companies.”