Planters generally outperformed in the final quarter

KUALA LUMPUR: Plantation companies mostly came either above or in line with expectations of the research team at Hong Leong Investment Bank Bhd (HLIB Research) in the final quarter of 2020 (4Q20).

Of the eight companies which reported their quarterly results in February 2021, six came in above expectation while the remaining two coming in within the research firm's expectation.

“We note that higher-thanexpected realised palm product prices were the key variances against our estimates,” it said in a sector review yesterday.

“Quarterly, six out of eight companies reported improved their quarter on quarter (q-o-q) performance, boosted mainly by higher realised palm product prices and seasonally higher FFB output.

“We note the 27 per cent q-o-q decline in FGV Holding Bhd's core earnings in 4Q20 was due mainly to lower fresh fruit bunch output by 22.6 per cent, but partly mitigated by higher palm product prices), turnaround at sugar segment and lower net finance cost.”

Year on year (y-o-y), HLIB Research saw that higher palm product prices more than mitigated weaker FFB output as seven out of eight companies reported significantly higher core earnings in 4Q20, boosted mainly by sharply higher palm product prices.

“On q-o-q basis, companies with higher exposure in Malaysia operations (particularly FGV, IOI

Corporation Bhd and Sime Darby Bhd) clocked in lower FFB output in 4Q20, due mainly to labour shortfall.

“This resulted from Covid-19 pandemic, which restricted the entry of foreign labour into the country.”

Moving forward, HLIB Research believed labour shortage issue in Malaysia will persist into 1H21, and this will continue to drag planters with higher upstream exposure in Malaysia operations.

“During the quarter, most integrated players under our coverage – namely IOI, Kuala Lumpur Kepong Bhd and Sime Darby Bhd – saw their downstream margins improving on q-o-q basis, and this was due mainly to improving demand sentiment for downstream products, particularly in European markets.

“Genting Plantations Bhd, on the other hand, saw its downstream earnings contracted further in 4Q20, due mainly to weak demand for biodiesel products.

“We maintain our crude palm oil (CPO) price assumption of RM2,700 per metric tonne (MT) for 2020-2022. Year to date, CPO price averaged at RM3,828 per MT, we anticipate CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will result in more balanced demandsupply dynamics.

“We maintain our neutral rating on the sector, as we believe current high CPO price will not sustain over the longer term.”