Tough time ahead for plantation sector, no more double-digit profit growth in 2023 — analysts
14/12/2022 (The Edge Markets), Kuala Lumpur - It is unlikely that plantation companies will continue to post double-digit profit growths in 2023, according to analysts, due to lower crude palm oil (CPO) prices, higher energy costs, and costlier raw material.
CPO prices climbed to a high of RM8,076.50 per tonne on March 22 before falling to a low of RM3,275 per tonne on Sept 28, statistics from the Malaysia Palm Oil Board (MPOB) showed. It is currently trading at RM3,896.50 per tonne — down 25.3% year-to-date from RM5,214 per tonne.
"Compared with CPO prices at about RM5,000 per tonne at the start of the year and now at about RM3,000 per tonne, plantation companies are unlikely to see double-digit growth in 2023, that's for sure," RHB research analyst Hoe Lee Leng told The Edge when contacted on Wednesday (Dec 14).
Hoe kept her CPO price assumptions of RM3,900 per tonne for 2023 and RM3,500 per tonne for 2024. “We expect supply to improve further in 2024, while pent-up demand seen in 2023 will moderate, leading to lower prices,” said Hoe.
CGS-CIMB analyst Ivy Ng Lee Fang expects the earnings per share (EPS) of the plantation stocks she tracks to decline 33% by 2023, driven by lower prices from CPO and higher costs. “We predict earnings to decline year-on-year in 2023 versus 2022 due [to] expectation for CPO price to fall to RM3,800 per tonne in 2023, versus RM5,122 per tonne in 2022,” she told The Edge.
Both Hoe and Ng remained ‘neutral’ on the sector.
Kenanga Research, on the other hand, downgraded the sector to ‘neutral’ from ‘overweight’, as it trimmed its CPO price assumption in 2023 by 5% to RM3,800 per tonne, from RM4,000 previously.
“The KL Plantation Index has continued to hold up against the broader market trend, underpinned by resilient food and fuel demand, asset-rich book value and undemanding valuations amid global economic uncertainties. However, margins are facing pressures from easier palm oil prices compounded by rising cost of labour, fertiliser and transportations,” said the research house.
At the time of writing, the Plantation Index was up 0.96% or 64.31 points at 6,750.24.
KLK, IOI Corp among top picks
Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd are among analysts' top picks for the sector. According to Bloomberg data, KLK has garnered 11 'buy' calls and eight 'hold' calls, with a 12-month TP of RM24.71. IOI Corp, meanwhile, has nine 'buy' calls, seven 'hold' calls, and three 'sell' calls, with a 12-month TP of RM4.21.
"They are more integrated and the sensitivity to CPO prices is not as high as pure planters without downstream activities," said Hoe, who has both on 'buy', with a TP of RM27.85 for KLK, and RM4.60 for IOI Corp.
At the time of writing, KLK was trading at RM21.14 sen, up 14 sen from the previous day's close; IOI Corp was at RM3.77, up three sen.
Ng, who also has both stocks on 'buy', has set a TP of RM22.87 for KLK. "There are potential cost synergies from the acquisition of IJM Plantation and downstream earnings that could help cushion the impact of lower CPO prices."
Kenanga, meanwhile, named KLK its top pick based on its track record, efficient upstream operations and strong regional presence. It rated the stock 'outperform', with a TP of RM25.50.
KLK’s net profit eased 4% to RM2.17 billion in the financial year ended Sept 30, 2022 (FY2022) from RM2.26 billion in FY2021, though revenue grew 36% to RM27.15 billion from RM19.92 billion, as it was impacted by investment losses.
IOI Corp closed its FY2022 ended June 30 with a 23.74% net profit rise to RM1.73 billion from RM1.39 billion in FY2022, as revenue climbed 38.46% to RM15.58 billion from RM11.25 billion.
EU ban more a negative to small growers and farmers
The recent European Union (EU) decision to ban import of several products, such as palm oil, beef, soy, coffee, cocoa and timber, will also have an impact on the sector, albeit more in the medium term and more for smallholders
The EU agreed to ban imports of these products, which have been identified as "drivers of deforestation", if they come from land deforested after Dec 31, 2020. When the new rules come into force, all relevant companies will have to comply with strict due diligence when placing their products on the EU market.
Importing companies will have to prove that their products are free of deforestation, and they will have to demonstrate "accurate geographical information on the cultivated areas" from which the goods originate. The EU will have to formally adopt the regulation before it can take effect, and traders have 18 months to implement the rules.
"The impact is negative, but it is more medium-term. But most likely it will hit small growers and small farmers," said Hoe. "It will affect palm oil producers because they will have to prove that the palm oil produced is not from deforested areas, which lead to higher administrative costs for planters," added Ng.
MPOB director-general Datuk Dr Ahmad Parveez Ghulam Kadir said in a statement on Tuesday that EU’s regulation only targets the cultivation of commodities from developing economies as the major challenge in protecting the global environment.
“There are discrimination here as other crops, such as rapeseed and sunflower, are not targeted. In addition, smallholders may struggle to comply and be excluded from the EU market,” he said.