Planters’ earnings outlook still uninspiring
12.06.2019 (The Star Online) - PETALING JAYA: The earnings outlook for most plantation companies will likely remain uninspiring in the second quarter of this year.
This is considering the still weak crude palm oil (CPO) and palm kernel (PK) prices, according to Maybank IB Research in its report.
Companies with downstream operations such as IOI Corp Bhd
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(KLK) are likely to weather the rough times better during the quarter under review.
The research unit noted that planters’ earnings have remained lacklustre in the first quarter as the industry posted its fifth consecutive quarter of year-on-year (y-o-y) core profit after tax and minority interests (Patami) decline.
“Our ‘neutral’ view on the plantation sector is unchanged. However, the long funds should consider taking the opportunity to accumulate bombed out small-mid caps during this downcycle in anticipation of better CPO price in the medium term.
“Our ‘buy’ calls are Ta Ann Holdings Bhd
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(SOP), premised on their attractive low enterprise value per planted hectare,” added Maybank IB Research.
It pointed out that the first quarter core Patami largely missed the estimates.
All the stocks under Maybank IB Research coverage had fallen short of its expectations on lower-than-expected CPO prices, whereby the Malaysian Palm Oil Board’s spot price is down by 19% y-o-y and PK prices down by 40% despite being mitigated by the growth in fresh fruit bunch (FFB) output.
The cumulative revenue fell 16% y-o-y, while core Patami fell a sharper 50% y-o-y as CPO price inches closer to the industry’s all-in operating cost of production of about RM1,830 per tonne in 2018.
Maybank IB Research said all plantation stocks (with the exception of Ta Ann) reported weaker y-o-y core Patami dragged by low palm oil prices: SOP (-68%), Sime Darby Plantation Bhd (-67%), Genting Plantations Bhd
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(-49%), KLK (-44%), IOI Corp (-25%), TSH Resources Bhd
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(-21%).
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posted their fourth consecutive quarter of core losses, while FGV Holdings Bhd posted its fifth.
Ta Ann’s core profit jumped 95% (due to low base) mainly on its timber earnings recovery.
Meanwhile, the research unit said CPO prices would likely trend higher in the second half of 2019 as “the weak first quarter CPO price gets dragged down by the huge stockpile brought forward and the still strong output.”
“But Malaysia’s output is slowing down. We stand by our earlier view that the output growth this year will slow down from the second quarter as oil palm trees enter the biological rest mode after nearly two years of good harvests post the last major El Nino and due to a lack of fertilising work by smallholders in the second half of 2018 on poor CPO prices.
“This will help CPO price to strengthen in the second half of 2019,” said Maybank IB Research.
Beyond the first half results, it pointed out that the CPO price downside is presently limited by the wider-than-usual price discounts of palm oil against Argentina soya oil and the European Union (Germany) rapeseed oil.
It expected the discretionary demand for palm biodiesel could still increase during the summer months of the Northern Hemisphere despite the recent retracement in Brent crude oil price as the current palm oil futures and gas oil futures spread makes economic sense even without subsidies.
Maybank IB Research is keeping its 2019 CPO average selling price forecast of RM2,350 per tonne, while the failure of spot CPO price to recover by mid-year may necessitate a review.
Nonetheless, the research unit expected investors should look beyond the weak first quarter results given the cyclical nature of the business.