Drop in production may affect performance despite higher prices

28/04/2010 (The Star Online) - PRICES of crude palm oil (CPO) and rubber may have spiralled upwards in the past three months, but local plantation companies are expected to post sequentially lower earnings for the quarter ending March 31 following over 20% drop in palm oil production nationwide.

Both commodities were fundamentally supported by the El Nino-led dry weather spell and abnormal heavy rainfall, which saw lower output among major producers on the back of increasing demand from major consumers.

Rubber performed extremely well, hitting new highs to trade above RM10,000 per tonne currently, more than doubled from last year – thanks to the strong recovery in the automobile and tyre-manufacturing industries in China and India.

CPO, meanwhile, still managed to stay slightly above RM2,500 per tonne as it juggled between higher soybean harvests, high palm oil inventory in China, the ban on Argentina soybean oil in China and higher ringgit against the US dollar.

For the quarter ending March 31, commodity analysts expect most planters to register lower earnings on quarter-on-quarter (q-o-q) basis but for year-on-year (y-o-y), many will post higher earnings, supported by double-digit increase in average CPO prices and better fresh fruit bunches (FFB) yield.

Hwang DBS Vickers Research said Malaysian planters were expected to book weaker earnings as higher CPO prices would not be able to offset lower production.

In its Malaysian planters’ results preview, the brokerage said IJM Plantations Bhd’s fourth-quarter financial year 2010 (FY10) earnings was expected to jump 127% y-o-y, driven by 15% to 20% rise in average CPO price and 11% growth in FFB output to 140,884 tonnes.

However, on q-o-q basis, earnings should be 50% weaker, dragged by higher fertiliser costs while FFB production plunged by 24%.

For IOI Corp Bhd, anticipation over 12% increase q-o-q in palm oil prices in third-quarter FY10 would not be able to offset 26% q-o-q drop in group’s FFB volume. However, the strengthening of the ringgit would work to offset such decline through translation of foreign exchange gains, which the brokerage estimate should reach RM160mil.

Sime Darby Bhd’s third-quarter FY10 should also indicate flat q-o-q performance as seasonally lower production in plantation division may be offset by higher prices and absence of one-off RM210mil cost-escalation write-down in Sime Engineering Services Bhd in the previous quarter.

However, Hwang DBS Vickers Research is positive on upstream planters like IOI, Kuala Lumpur Kepong Bhd and Sime Darby which also have exposure to rubber.

For planters with US dollar debts, lower borrowing costs and a reversal in foreign exchange losses could lift profits.

ECM Libra Investment Research, in its weekly review, said the plantation sector in terms of fundamental appeared to be stable for now.

“This gels with our neutral call on the sector with range bound CPO prices for the year,” it said.

However, the brokerage would be monitoring issues like exports as well as potential supply disruption later this year due to an extended effects of El Nino over the first quarter 2010.

Independent cargo surveyor SGS indicated that palm oil exports to India from April 1 to 20 was about 81% lower compared with the same period in March.

OilWorld executive director Thomas Mielke had said that there could be a switch from palm oil to soy oil in India this year.

This may be one of the repercussions of China’s recent ban on Argentina soy oil which resulted in narrower price discount between CPO and soy oil. (The traditional CPO price discount to soy oil is about US$100 to US$200 per tonne)

Many market players believe that the substitution effect has kicked in with CPO price discount to soy oil already below US$100 per tonne.

Another foreign broking house has an underweight rating as the market is believed to have factored in the CPO price hike in the coming months.

In addition, CPO price is being capped by increasing soybean stocks, a narrower CPO price discount to soy oil and a potential recovery in CPO production in the coming months.