Plantation sector earnings on the upside

PLANTATION earnings have generally surprised on the upside in the third quarter, thanks in part to higher crude palm oil (CPO) prices.

For example, Genting Plantations Bhd’s net profit for the third quarter ended Sept 30 more than doubled to Rm61.4mil from Rm18mil a year ago on the back of stronger palm product prices and higher demand for its refined palm products. Revenue rose 35.8% to Rm645.6mil from Rm475.4mil previously.

With CPO prices trending higher into November, analysts are optimistic of sustained earnings for the final three months of the year.

Maybank IB Research is expecting Genting Plantations’ earnings for the fourth quarter of 2020 to be stronger quarter-on-quarter, driven by higher CPO average selling price and fresh fruit bunches (FFB) output.

CPO prices have been steadily climbing since the middle of the year after falling to a low of RM1,946 in May from RM3,137 at the start of the year. Not only did the commodity regain lost ground from before the Covid-19 pandemic struck, it also rose above RM3,500 per tonne over a week ago, the highest level since April 2012.

According to reports, industry observers are expecting continued tight supply to buoy CPO prices at this level at least into the first quarter of 2021.

Analysts had raised their CPO price forecasts earlier this month after palm oil inventory fell to a three-year low of 1.57 million tonnes at end-october due to lower-than-expected output.

CGS-CIMB notes that low stocks are likely to be supportive of CPO prices, but it opined that stocks may have bottomed in October 2020.

Certainly, not everyone thinks the rally party will last and that the commodity could, perhaps, be nearing its peak.

“While CPO prices will likely remain above our revised price range in the coming months because of continued supply constraints, average CPO prices over the last five to 10 years of RM2,400 to RM2,500 per tonne suggest that the current high of around RM3,500 per tonne is unlikely to be sustained,” says Moody’s Investors Service in a statement.

Nonetheless, Moody’s raised its forecast for CPO prices to range between RM2,200 and RM2,600 per tonne over the coming 12 months from its previous price range of RM1,900 to RM2,300.

The tight supply of vegetable oils remains a concern for the industry amid strong demand from India and China.

As a matter of fact, yesterday, India reduced its levy on CPO to 27.5% from 37.5% to shield local consumers from the rally in prices.

Reports note that India’s palm oil purchases climbed to a three-month high last month and the lower tax is expected to further boost inbound shipments and support benchmark prices of the commodity.

India is the world’s biggest buyer of edible oils. This development could lend strength to Malaysia’s export of the commodity and boost local planters.

Rabobank forecast an increase in global palm oil production next year by 3.1 million tonnes or 4% year-on-year (y-o-y) to 80.3 million tonnes on the back of production recovery in Indonesia and Malaysia.

Meanwhile, global palm oil demand is forecast to increase in 2020-2021 by 2.2 million tonnes or 3% y-o-y to 77.5 million tonnes.

The strong support for CPO prices certainly bodes well for plantation companies’ earnings prospects. But given the uncertainty on whether the commodity has reached its peak, it remains to be seen if planters’ earnings will continue to hold.

Analysts do seem positive on this front. With the bumper earnings this year, many have also upgraded their earnings forecast for 2021, albeit at a lower growth rate than this year.

Following its industry-wide CPO average selling price revision to RM2,660 per tonne from RM2,400 for 2020 and RM2,500 from RM2,400 for 2021, Maybank revised Genting Plantations’ forecast FY20 and FY21 earnings per share (EPS) up by 27% and 3%, respectively.

It also raised Genting Plantations to “hold” from “sell” previously with a higher target price of RM9.87.

Affin Hwang Capital has also raised Sime Darby Plantation Bhd’s 2020/2021 core EPS by 32.3%/24.6%, to take into account higher contribution from the upstream plantation division with a higher CPO assumption of RM2,620 per tonne from RM2,450 to RM2,500 per tonne previously.

Likewise, CGS-CIMB raised its forecast FY20-FY22 net profit for Hap Seng Plantations Holdings Bhd by 35%-226% to account for the stronger CPO prices.

Meanwhile, BIMB Securities Research revised TH Plantations Bhd’s earnings forecast for FY20 and FY21 higher to Rm36.7mil and Rm40.8mil, respectively, from Rm10.1mil and Rm20.3mil previously amid adjustments in its average selling price of palm products, production, costs and plantation’s margin assumptions.

While the jury may be out on how long CPO prices can be sustained at the current high, plantation companies’ earnings seem to still have some legs left to run.

“The average CPO prices over the last five to 10 years of RM2,400 to RM2,500 per tonne suggest that the current high of around RM3,500 per tonne is unlikely to be sustained”. Moody’s Investors Service