KUCHING: Analysts acknowledge that plantation companies continue to face hardships as can be seen by their results in the first quarter of 2019 (1Q19).
Kenanga Investment Bank Bhd (Kenanga Research) said it was a slightly better quarter where out of 12 plantation companies under its coverage, four missed forecasts while nine missed consensus estimates.
“In our view, this is relatively better than 4Q18 during which 7 out of 12 companies missed our/consensus estimates,” it said in its strategy review report earlier this week.
On a quarterly basis, the planters reported a median earnings improvement of 15 per cent as the average crude palm oil (CPO) realised-price edged up eight per cent, masking an average fresh fruit bunch (FFB) decline of 10 per cent arising from seasonality.
“For the four companies that missed our forecasts – Kuala Lumpur Kepong Bhd (KLK), Sime Plantations Bhd (SimePlant), Ta Ann Holdings Bhd and United Malacca Bhd – either caused by lower-than-expected CPO price or higher-than-expected production costs, we have trimmed FY19 and FY20E earnings,” it further said.
“We have also reduced our target prices for three companies – KLK, SimePlant and TSH Resources Bhd – and downgraded KLK. This contrasts with 4Q18 during which we cut target prices for five companies and downgraded five of our calls.”
Kenanga Research believe CPO prices will remain under pressure in the second half of the year, potentially trading in the range of RM1,800 to RM2,100 per metric tonne (MT) and averaging only RM2,000 per MT in 2019, given rising stockpiles in both Indonesia and Malaysia.
“Additionally, while biodiesel mandates seem to be panning out well – expected to absorb circa 13 per centof CPO production in Indonesia and four per cent in Malaysia – the intensifying US-China trade war tensions are likely to discourage soybean oil prices like what happened last year.
“In our opinion, this will dwarf any positive trade/demand impact on CPO and keep its prices under pressure in the near term, as the two commodities are close substitutes with their prices highly correlated.
“All-in, we believe planters’ earnings will hit a rough patch in coming quarters due to the depressed CPO price environment, which will likely overshadow any production pickup in 2H – but likely to remain within expectation as it has already been reflected in our latest earnings adjustments.”
In a separate note, MIDF Amanah Investment Bank Bhd (MIDF Research) saw that plantation companies under its coverage continued to experience a challenging quarter as the price of CPO deteriorated to lower levels, almost reverting back to record level seen in November 2018.
“For instance, the price of the benchmark third-month palm oil contract on Bursa Malaysia Derivatives Exchange (BMD) has dropped from RM2,299 per MT in January to RM2,106 per MT in March 2019. There are several factors at play contributing to the weak CPO price environment during the review quarter,” it detailled.
“Firstly, the CPO inventory level remained elevated due to higher production growing at a faster pace than export demand. Secondly, the lower soybean price caused by oversupply issue had been putting downward pressure on CPO price as well.
“Thirdly, the uncertainty in US-China trade agreement led to buyers withheld palm oil purchases leading to lower export demand.”
Consequently, the lower pricing of CPO has battered plantation companies’ earnings, particularly the pure upstream players. Note that six out of nine plantation companies under MIDF Research’s coverage have performed below expectations.
“Nonetheless, FGV Holdings Bhd was the only outperformer due to higher FFB production and lower cost of production, reaping the benefits from its progressive transformation plan,” it stated.
-- Borneo Post
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