by SHAHEERA AZNAM SHAH
THE plantation sector is expected to produce a stronger output in the second half of 2018 (2H18), according to a survey among the industry’s corporate leaders.
Maybank Investment Bank Bhd said based on its survey among corporate captains, the industry expects a much stronger output growth in 2H18, with a good chance that output in the fourth quarter (4Q) to be the highest.
As such, planters’ earnings are also expected to peak in 4Q due to higher output, higher crude palm oil (CPO) price and minimal cost of fertilising.
“Between 3Q and 4Q, earnings will likely peak in 4Q, while 3Q earnings will not look as promising, given that the CPO and palm kernel (PK) average selling prices (ASPs) are still at a weak spot,” Maybank Investment Bank stated in its research note.
As at Sept 6, the 3Q to-date CPO price has averaged RM198 per tonne, an 18% year-on-year (YoY) decline, while PK price has averaged RM1,800 per tonne, a 23% YoY decline.
The expectation should be a positive change for Malaysiabased planters that registered a lacklustre performance in 2Q due to the low CPO prices, low production output and high production cost.
Maybank Investment Bank said the earnings decline in 2Q was more drastic for TH Plantations Bhd and Boustead Plantations Bhd despite the CPO’s ASP approaching breakeven level for others.
“The sector’s underperformance was generally due to a combination of low CPO and PK ASPs, low fresh fruit bunch (FFB) output and higher than expected cost, which was likely due to accelerated fertilising work facilitated by the conducive weather,” the research house stated in the report.
The report also revealed that Genting Plantations Bhd remains the only ‘Buy’ as the research house downgraded Sarawak Oil Palms Bhd to ‘Hold’ from ‘Buy’ in 2Q following its poor results.
“2Q results were largely disappointing. Out of the 10 stocks under our coverage, only 20% were in line, for example Sime Darby Plantation Bhd and TSH Resources Bhd, while the rest fell short of our expectations.”
The research house added that the low production output was mostly felt by Sabah and Peninsular Malaysia planters, while planters with bigger exposure in Indonesia posted a strong growth.
Maybank Investment Bank said Sime Darby Plantation benefitted from a stronger downstream contribution as it focuses on higher margin and differentiated products.
For IOI Corp Bhd, the investment bank said the company’s headline numbers were partially dragged down by foreignexchange translation losses on its US dollar debt.
The research house said the CPO price is expected to be dull in 2H due to the escalating global trade tension, US soybean harvest and a relatively weak demand from India.
“The only positive view right now has been the high crude oil price, which has boosted discretionary demand for palm biodiesel,” it said.
Maybank Investment Bank said Indonesia remains the important element in supporting CPO price as the government has pledged to boost the usage of palm biodiesel in 2H after a disappointment in the domestic blend’s performance.
“As long as fossil fuel price remains high, it will provide a good floor price support for CPO price.
“We anticipate CPO price to make its seasonal price recovery in 4Q as the market price forward weaker supply in 1Q of 2019,” it said.
The research house maintained its 2018 CPO ASP forecast of RM2,450 per tonne, while recognising the earnings risk which is highly affected by the CPO price recovery.