The Edge Markets (22/11/2017) - KUALA LUMPUR: Lingering effects of the scorching El Nino weather phenomenon, which have affected oil palm players’ production and earnings in this part of the world since 2015, will continue to affect plantation players, specifically for those who only have estates in Sabah.

“The impact of El Nino comes in two waves. The second wave began in the third quarter of this year (3Q17), which led to a year-on-year (y-o-y) decline in Sabah’s production,” MIDF Research senior analyst Alan Lim told The Edge Financial Daily over telephone.

According to the Malaysian Palm Oil Board, crude palm oil production for Sabah in 3Q17 (July to September) declined 7.2% to 1.33 million tonnes from 1.43 million tonnes in the same period last year. Overall production for Malaysia, however, grew 8.3% y-o-y to 5.42 million tonnes from five million tonnes.

“The decline in Sabah’s palm oil production goes against the trend in Malaysia’s overall production. The effects of El Nino are still there (Sabah). Hence, we expect companies purely concentrated in Sabah to post lower FFB (fresh fruit bunch) production figures and earnings in their latest quarterly financial results,” Lim said.

“However, for those whose plantations are spread across other parts of the country namely Peninsular Malaysia and Sarawak as well as Indonesia, we foresee minimal impact on both production and earnings,” he said.

Companies with full exposure to Sabah include IJM Plantations Bhd, TSH Resources Bhd and Hap Seng Plantations Holdings Bhd.

On Monday, Hap Seng Plantations said its net profit for the third financial quarter ended Sept 30, 2017 fell 39% y-o-y to RM25.9 million from RM42.7 million, on lower sales volume of CPO and palm kernel (PK), and lower PK selling price. Revenue shrank 29% to RM113.58 million from RM160.17 million.

IJM Plantations and TSH Resources have not released their respective third-quarter financial results.

Still, Lim gave assurance that the declining trend in FFB production in Sabah is temporary, as the rise in CPO yield in October (up 7.4% y-o-y to 506,176 tonnes from 471,408 tonnes) signalled the easing impact of El Nino.

“Weaker earnings for 3Q17 from Sabah planters are expected but 4Q17 should register stronger figures as production already began improving in October. The impact will be minimal as we have entered the last leg of El Nino,” Lim said.

Meanwhile, Inter-Pacific Securities research head Pong Teng Siew said the fall in Sabah planters’ performance was not only due to El Nino effect but also other factors like India’s imposition of higher import duty on CPO and the European Union’s (EU) restrictions on palm oil imports, which affected CPO prices.

“Output from Sabah planters fell below expectations, based on 3Q17 figures. The effects of El Nino have actually peeled off in other regions but for Sabah, they intensified. That said, the negatives are peeling off as El Nino is making way for La Nina,” Pong said.

“But it’s not just El Nino to blame. There are other factors as well such as future CPO prices. With recent developments in India and the EU, the foreseen impact on Malaysia, particularly Sabah, is not favourable,” he added.