MARKET DEVELOPMENT
UOB Kay Hian Research Maintains Overweight on Plantations
UOB Kay Hian Research Maintains Overweight on Plantations
31/07/2013 (The Star) - UOB Kay Hian Malaysia Research is expecting another weak earnings quarter for plantation companies due to weak crude palm oil (CPO) production growth and CPO price.
However, it said on Tuesday integrated players should continue outperforming pure upstream players on better downstream margin due to lower raw material costs arising from CPO export tax structure.
"We expect CPO price to trend higher from the current low as the market starts to realise the weak production recovery in Malaysia and potential production disappointment in Indonesia. Maintain Overweight," it said.
UOB Kay Hian Malaysia Research said plantation earnings were expected to be weaker in the second quarter of 2013 (Q2, 2013) and it did not expect this to surprise the market.
"For Q2, 2013, plantation companies are expected to post weaker net profit on-quarter ranging from 0% to -15% and weaker on-year ranging from -5% to -30%," it said.
The research house attributed this to weak production growth. Most plantation companies reported on-quarter contraction in CPO production due to delay in production cycle, especially Sabah's estates that have suffered slow yield recovery after the strong growth in October 2012 to Jan 2013.
Another factor was that CPO price would stay flat on-quarter but down sharply on-year. Malaysia Palm Oil Board (MPOB) reported CPO price of RM2,317 a tonne in Q2, 2013 (+0.7% on-quarter, -27.8% on-year).
Elaborating on the downstream players, it said integrated plantation companies would perform better in the weak CPO price environment with better performance from downstream operations.
It added the downstream operation would benefit from lower raw material prices and the change in exports tax structure effective Jan 1, 2013. These would result in downstream operations seeing a turnaround compared with 2012.
It explained that it was maintaining an Overweight as CPO price was expected to gain upside momentum on easing concerns over high inventory, slower production and recovery in demand.
"Despite the current low CPO price, we expect CPO price to trend higher as the market starts to realise the weaker production recovery in Malaysia and potential production disappointment in Indonesia," it said.
UOB Kay Hian Malaysia Research said it preferred Singapore- and Indonesia-listed companies for their young age profiles and stronger production growth that could better leverage on the rising CPO prices.
Its picks were Bumitama Agri (Buy and target price of S$1.23) and First Resources (Buy and target price of S$2.60) which were are our preferred picks for sector exposure for their young and balance age profile and efficient management.
"For Malaysia exposure, our top BUY is IOI Corp (Buy, target price: RM6.35) as the relisting of IOI Property would allow IOI to return to a premium rating as an efficient pure plantation play with good track record," it said.
However, it said on Tuesday integrated players should continue outperforming pure upstream players on better downstream margin due to lower raw material costs arising from CPO export tax structure.
"We expect CPO price to trend higher from the current low as the market starts to realise the weak production recovery in Malaysia and potential production disappointment in Indonesia. Maintain Overweight," it said.
UOB Kay Hian Malaysia Research said plantation earnings were expected to be weaker in the second quarter of 2013 (Q2, 2013) and it did not expect this to surprise the market.
"For Q2, 2013, plantation companies are expected to post weaker net profit on-quarter ranging from 0% to -15% and weaker on-year ranging from -5% to -30%," it said.
The research house attributed this to weak production growth. Most plantation companies reported on-quarter contraction in CPO production due to delay in production cycle, especially Sabah's estates that have suffered slow yield recovery after the strong growth in October 2012 to Jan 2013.
Another factor was that CPO price would stay flat on-quarter but down sharply on-year. Malaysia Palm Oil Board (MPOB) reported CPO price of RM2,317 a tonne in Q2, 2013 (+0.7% on-quarter, -27.8% on-year).
Elaborating on the downstream players, it said integrated plantation companies would perform better in the weak CPO price environment with better performance from downstream operations.
It added the downstream operation would benefit from lower raw material prices and the change in exports tax structure effective Jan 1, 2013. These would result in downstream operations seeing a turnaround compared with 2012.
It explained that it was maintaining an Overweight as CPO price was expected to gain upside momentum on easing concerns over high inventory, slower production and recovery in demand.
"Despite the current low CPO price, we expect CPO price to trend higher as the market starts to realise the weaker production recovery in Malaysia and potential production disappointment in Indonesia," it said.
UOB Kay Hian Malaysia Research said it preferred Singapore- and Indonesia-listed companies for their young age profiles and stronger production growth that could better leverage on the rising CPO prices.
Its picks were Bumitama Agri (Buy and target price of S$1.23) and First Resources (Buy and target price of S$2.60) which were are our preferred picks for sector exposure for their young and balance age profile and efficient management.
"For Malaysia exposure, our top BUY is IOI Corp (Buy, target price: RM6.35) as the relisting of IOI Property would allow IOI to return to a premium rating as an efficient pure plantation play with good track record," it said.