MARKET DEVELOPMENT
Weak CPO Prices Put Pressure on Earnings
Weak CPO Prices Put Pressure on Earnings
13/08/2015 (The Star) - The quarterly earnings of most plantation companies will continue to be undermined by the weak CPO prices now hovering below RM2,100 per tonne.
Market sentiment is also pressured by rising stockpile and higher production outlook in the nearby months, plantation analysts said.
They opined that CPO prices could likely dip as low as RM1,900 per tonne but “this will be shortlived unless the crude oil price sees a bigger downturn.”
The Malaysian Palm Oil Board’s latest July statistics on Monday showed that palm oil stocks rose to 2.27 million tonnes with production surging to 1.82 million tonnes while export shrank to 1.602 million tonnes respectively.
Kenanga Research expects plantation companies in the upcoming reporting season could see improvement quarter-on-quarter (q-o-q) in production growth but will likely post mixed year-on-year (y-o-y) financial results due to lower CPO prices.
“We observe that q-o-q CPO growth for Malaysia at 39% far exceeded the CPO price decline of 3% to RM2,194 per tonne, indicating that planters should report better upstream performance against the historically weak first quarter.
“However, y-o-y fresh fruit bunches (FFB) growth averaged 10%, which was below the CPO price decline of 15%. Thus, we expect most planters to report softer earnings and margins y-o-y in the coming results season,” the research unit said in its latest plantation sector report.
Despite weak CPO prices currently, Kenanga has reiterated its CPO price forecast at RM2,200 per tonne for 2015 and RM2,400 per tonne for 2016 respectively.
“We would only consider downgrading our CPO price forecast if August-December prices deteriorate below RM1,850 per tonne for an extended period, although we think this is unlikely.”
With mixed results likely in the upcoming reporting season, Kenanga advised investors to be selective and lean towards pure planters with younger average tree age and stronger FFB growth to offset lower CPO prices.
The planters under its coverage with above average FFB growth include Ta Ann Holdings Bhd, IJM Plantations Bhd and Genting Plantations Bhd.
CIMB Research meanwhile expects palm oil stocks to rise by 8% this month as “Malaysia enter the peak production season for palm oil.
This is likely to be bearish for near-term CPO prices.”
“Overall, we expect near-term concerns over the rising palm oil stocks and weak biodiesel demand to more than offset the risk of weaker supply due to a potential El Nino-induced drought on palm oil estates,” added the research unit.
Spot CPO price fell to its lowest level this year at RM1,993 per tonne last Friday.
The research unit also expecta near-term CPO prices to trade in the range of RM1,900-RM2,200 per tonne. It is still maintaining its average CPO price forecast of RM2,230 per tonne for 2015 and RM2,450 for 2016.
“We expect planters to report weaker 2Q15 earnings on y-o-y basis as the 10% y-o-y rise in CPO output will only partly offset the 15% y-o-y drop in local CPO price for the same period.
However, 2Q15 results should be much better than 1Q15 as the 39% q-o-q bounce in output should more than offset the slight drop of 3% q-o-q in average CPO price.
In its coverage, CIMB favour SGX-listed First Resources Ltd, Genting Plantations and Indonesia-based PT Astra Agro Lestari Tbk.
MIDF Research is maintaining a “neutral” call with average CPO price at RM2,175 per tonne for 2015 and RM2,100 per tonne for 2016 respectively.
PPB Bhd is its top pick. MIDF said: “We expect the upcoming result by end-August to register strong growth of at least 20% y-o-y in view of recent good set of results from its associate Wilmar Ltd.
“We also expect PPB’s first half financial year 2015 earnings growth to outperform all other index-linked planters such as Sime Darby, IOI Corp and KL Kepong.
MIDF Research added PPB was poised to benefit from higher US dollar-ringgit rate as Wilmar earnings was reported in US dollar denomination.
The research house said it also expected the July inventory data to have a neutral impact on the CPO price as its negative impact was neutralised by the high export growth seen in the first 10 days of August.
Market sentiment is also pressured by rising stockpile and higher production outlook in the nearby months, plantation analysts said.
They opined that CPO prices could likely dip as low as RM1,900 per tonne but “this will be shortlived unless the crude oil price sees a bigger downturn.”
The Malaysian Palm Oil Board’s latest July statistics on Monday showed that palm oil stocks rose to 2.27 million tonnes with production surging to 1.82 million tonnes while export shrank to 1.602 million tonnes respectively.
Kenanga Research expects plantation companies in the upcoming reporting season could see improvement quarter-on-quarter (q-o-q) in production growth but will likely post mixed year-on-year (y-o-y) financial results due to lower CPO prices.
“We observe that q-o-q CPO growth for Malaysia at 39% far exceeded the CPO price decline of 3% to RM2,194 per tonne, indicating that planters should report better upstream performance against the historically weak first quarter.
“However, y-o-y fresh fruit bunches (FFB) growth averaged 10%, which was below the CPO price decline of 15%. Thus, we expect most planters to report softer earnings and margins y-o-y in the coming results season,” the research unit said in its latest plantation sector report.
Despite weak CPO prices currently, Kenanga has reiterated its CPO price forecast at RM2,200 per tonne for 2015 and RM2,400 per tonne for 2016 respectively.
“We would only consider downgrading our CPO price forecast if August-December prices deteriorate below RM1,850 per tonne for an extended period, although we think this is unlikely.”
With mixed results likely in the upcoming reporting season, Kenanga advised investors to be selective and lean towards pure planters with younger average tree age and stronger FFB growth to offset lower CPO prices.
The planters under its coverage with above average FFB growth include Ta Ann Holdings Bhd, IJM Plantations Bhd and Genting Plantations Bhd.
CIMB Research meanwhile expects palm oil stocks to rise by 8% this month as “Malaysia enter the peak production season for palm oil.
This is likely to be bearish for near-term CPO prices.”
“Overall, we expect near-term concerns over the rising palm oil stocks and weak biodiesel demand to more than offset the risk of weaker supply due to a potential El Nino-induced drought on palm oil estates,” added the research unit.
Spot CPO price fell to its lowest level this year at RM1,993 per tonne last Friday.
The research unit also expecta near-term CPO prices to trade in the range of RM1,900-RM2,200 per tonne. It is still maintaining its average CPO price forecast of RM2,230 per tonne for 2015 and RM2,450 for 2016.
“We expect planters to report weaker 2Q15 earnings on y-o-y basis as the 10% y-o-y rise in CPO output will only partly offset the 15% y-o-y drop in local CPO price for the same period.
However, 2Q15 results should be much better than 1Q15 as the 39% q-o-q bounce in output should more than offset the slight drop of 3% q-o-q in average CPO price.
In its coverage, CIMB favour SGX-listed First Resources Ltd, Genting Plantations and Indonesia-based PT Astra Agro Lestari Tbk.
MIDF Research is maintaining a “neutral” call with average CPO price at RM2,175 per tonne for 2015 and RM2,100 per tonne for 2016 respectively.
PPB Bhd is its top pick. MIDF said: “We expect the upcoming result by end-August to register strong growth of at least 20% y-o-y in view of recent good set of results from its associate Wilmar Ltd.
“We also expect PPB’s first half financial year 2015 earnings growth to outperform all other index-linked planters such as Sime Darby, IOI Corp and KL Kepong.
MIDF Research added PPB was poised to benefit from higher US dollar-ringgit rate as Wilmar earnings was reported in US dollar denomination.
The research house said it also expected the July inventory data to have a neutral impact on the CPO price as its negative impact was neutralised by the high export growth seen in the first 10 days of August.