MARKET DEVELOPMENT
Lower Palm Production Not Stopping Upstream Players
Lower Palm Production Not Stopping Upstream Players
22/02/2017 (Borneo Post) - Earnings from upstream players in the plantation sector are expected to be largely unaffected by the seasonally lower palm production.
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), upstream players’ earnings are expected to come in stronger both quarter on quarter (q-o-q) and year on year (y-o-y) due to higher palm product prices despite a 7.2 per cent decline in CPO production y-o-y.
“On a q-o-q basis, we believe higher earnings will be driven mainly by prices of crude palm oil (CPO) and palm kernel (PK) which both saw increases of 12.1 and 14.1 per cent q-o-q, respectively.
“This will more than offset seasonally lower output of palm product within Malaysia,” justified the research arm, further adding that this is also applicable to a y-o-y basis as CPO and PK saw a 36.5 per cent and 80.5 per cent y-o-y increase respectively.
As such, the research arm is highly optimistic for the performances of upstream players but notes that the sentiment is only extended to pure upstream players as integrated players will likely experience drag from their downstream margins.
“We believe better upstream earnings will be partly offset by weaker downstream margins which arise from a narrower spread between prices of palm olein, CPO, and rising PK prices,” shared the research arm.
With this in mind, HLIB Research has declared its top picks within the plantation sector to be Sime Darby Bhd (Sime Darby) and Hap Seng Plantations Holdings Bhd (Hap Seng Plantations), maintain its ‘Buy’ rating on both stocks with target prices (TP) of RM10.06 and RM2.83 respectively.
“We like Sime Darby for its improved fundamentals arising from the recent coal price recovery and recent completion of its private placement exercise which has strengthened its balance sheet.
For Hap Seng Plantations, we like them for its superior management as evidenced by its above average fresh fruit bunch (FFB) yield and and strong profitability per hectate of planted land bank; and strong balance sheet showcasing a net cash per share of 12 sen,” the research arm jsutified.
HLIB Research maintained neutral on the plantation sector with unchanged CPO price assumptions of RM2,500 per metric tonne for 2017 and 2018.
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), upstream players’ earnings are expected to come in stronger both quarter on quarter (q-o-q) and year on year (y-o-y) due to higher palm product prices despite a 7.2 per cent decline in CPO production y-o-y.
“On a q-o-q basis, we believe higher earnings will be driven mainly by prices of crude palm oil (CPO) and palm kernel (PK) which both saw increases of 12.1 and 14.1 per cent q-o-q, respectively.
“This will more than offset seasonally lower output of palm product within Malaysia,” justified the research arm, further adding that this is also applicable to a y-o-y basis as CPO and PK saw a 36.5 per cent and 80.5 per cent y-o-y increase respectively.
As such, the research arm is highly optimistic for the performances of upstream players but notes that the sentiment is only extended to pure upstream players as integrated players will likely experience drag from their downstream margins.
“We believe better upstream earnings will be partly offset by weaker downstream margins which arise from a narrower spread between prices of palm olein, CPO, and rising PK prices,” shared the research arm.
With this in mind, HLIB Research has declared its top picks within the plantation sector to be Sime Darby Bhd (Sime Darby) and Hap Seng Plantations Holdings Bhd (Hap Seng Plantations), maintain its ‘Buy’ rating on both stocks with target prices (TP) of RM10.06 and RM2.83 respectively.
“We like Sime Darby for its improved fundamentals arising from the recent coal price recovery and recent completion of its private placement exercise which has strengthened its balance sheet.
For Hap Seng Plantations, we like them for its superior management as evidenced by its above average fresh fruit bunch (FFB) yield and and strong profitability per hectate of planted land bank; and strong balance sheet showcasing a net cash per share of 12 sen,” the research arm jsutified.
HLIB Research maintained neutral on the plantation sector with unchanged CPO price assumptions of RM2,500 per metric tonne for 2017 and 2018.