Rising CPO prices drive plantation firms’ prospects in early 2019

The commodity’s price has improved to a 5-month high as at end-January, giving a spark of hope for oil palm planters

By SHAHEERA AZNAM SHAH / Pic By BLOOMBERG

The rise in crude palm oil (CPO) prices since the beginning of this year has boosted plantation stocks, which have suffered from a three-year low price dilemma.

Given the current slow improvement in CPO price, analysts are predicting a revived prospect for many plantation companies.

The CPO price hit a three-year low in November 2018 at RM1,718 per tonne, with the inventory surpassing three million tonnes at the end of the year, dragging down the Bursa Malaysia Plantation Index to 6,446.63.

Since then, the commodity’s price has improved to a five-month high at end-January, giving a spark of hope for oil palm planters.

Analysts have remained favourable of a potential CPO price rebound this year, to trade between RM2,200 and RM2,400 per metric tonne (MT), thanks to the biodiesel initiatives and the slowing production in Indonesia following a robust yield in 2018.

The strong prospects of recovery in CPO price will also reflect on the growth of earnings in most plantation companies.

Sime Darby Plantation
Kenanga Investment Bank Bhd (Kenanga Research) expects Sime Darby Plantation Bhd’s (SDP) fresh fruit bunches (FFB) segment will grow at 5% in the current financial year ending Dec 31, 2018 (FY19).

“FFB growth outlook is guided at 5% in FY19. Besides FFB and CPO price growth, earnings improvements should stem from the recovery in the downstream operations and cost reduction,” it said, adding that operational efficiency could drive cost reduction efforts.

“We expect the group’s ex-mill cost of production to improve to RM1,200/ MT in FY19 from RM1,260 in FY18.”

Kenanga Research noted that the planter aims to achieve cost reduction by optimising the fertiliser application that will lower its usage, rationalising the head office expenses in Papua New Guinea (PNG) and improving labour efficiency.

It added that at present, SDP’s labour efficiency has an ample room for improvement.

“The group’s plantation in Indonesia has the labour-to-hectare (ha) ratio of 1:7.5, while PNG is at 1:5. Its plantation in Malaysia has a better benchmark of 1:10,” it said.

SDP share price closed lower at RM5.15 yesterday from RM5.17 last Monday. Some 1.97 million shares were traded, valued at RM10.17 million.

Sarawak Oil Palms
Maybank Investment Bank Bhd (Maybank IB) targets Sarawak Oil Palms Bhd’s (SOP) prospects to be lifted by its recent replanting exercise with a 10% output growth projection in 2019 due to its relatively young crops.

“For FY19, we forecast an increase of 10% year-on-year in output growth premised on its relatively young oil palm trees, which averaged at 11 years old,” it said.

Maybank IB said the value of SOP’s estates in Miri, valued around four times of its market capitalisation, should not be discounted amid the non-conducive environment for property development in the next several years.

“The group has two parcels of prime land for property development in Sarawak, which is some 12,000 acres (4,856.23ha) of Taniku estates on the fringe of Miri city and has a market price of around RM12 per sq ft,” the research house noted, adding that the two parcels of land have a combined market value of RM5.33 billion.

“While the property market is non-conducive for development in the near future, the intrinsic value of these two parcels of land should not be ignored,” it said.

The share price of SOP closed at RM2.69 from RM2.65 last Monday, with 26,700 shares exchanged hands.

IJM Plantations
IJM Plantations Bhd’s production is projected to be on track to exceed the one million mark in FY20 as its crops have matured, said Kenanga Research.

“We understand that production in the Sugut region, which accounts for about two-thirds of Sabah’s output, still see some lagged impact of El Nino in FY19.

“It is projected that the production in the region to fully recover by mid-FY20 and has conservatively guided the FFB yield of 20MT/ha for Malaysia in FY20.”

The research firm noted that as for Indonesia, IJM Plantations’ FFB yield is expected to improve from 17MT/ha in FY19 to 20MT in FY20.

“Overall, this translates into 23% growth in FFB output to 1.22 million MT in FY20,” it added.

Kenanga Research noted that IJM Plantations’ reported drawback last year on a shortage of barges in its Indonesian plantations will not prolong this year, but the research firm remained cautious on the prospect of the reoccurrence.

“We have gathered that an earlier shortage of barges in Indonesia has mostly eased since mid-December 2018, as the country’s production has tapered off on seasonality and fuel prices have declined.

“As such, the group does not expect any supply disruptions in the fourth quarter of 2019 (4Q19), but has noted the risk of encountering the same problem again if production picks up in the second half of the calendar year 2019,” it highlighted.

IJM Plantations’ shares closed higher at RM1.69 from RM1.63 last Monday. Some 41,300 shares were traded yesterday.

IOI Corp
IOI Corp Bhd is poised to have a better performance in its resource-based manufacturing segment than the previous quarter, supported by the low palm kernel (PK) selling prices and the higher demand of components in the oleochemical segment.

“Performance at IOI Corp’s resource-based manufacturing segment will perform better underpinned by the low PK price, and the stable demand for fatty acids and fatty esters will sustain performance at the oleochemical subsegment,” noted Hong Leong Investment Bank Research.

However, the research house said the group’s improved performance in its manufacturing division will not be sufficient to mitigate the near-term weakness in CPO prices.

“We cut the group’s core net profit forecasts for FY19 until FY20 by 17.3% and 11.5% respectively, largely to account for realised palm product prices during 1Q19, lower FFB yield for plantation segment and lower margin assumption at the manufacturing division,” it said.

IOI Corp share price closed flat at RM4.65 with 2.54 million shares traded yesterday valued at RM11.81 million.

Kuala Lumpur Kepong
Despite the favourable projection on most palm oil planters, Kenanga Research remained unexcited on Kuala Lumpur Kepong Bhd’s (KLK) immediate-term prospect as the research house is projecting a delicate quarter for the last three months of 2018 due to soft CPO prices.

“We expect a soft patch in 1Q19 for the group as we believe the drop in CPO price, which is estimated at 12% quarter-on-quarter, would outweigh the effect of KLK’s 8% growth projection in the FFB segment in the same period.

“KLK’s 1Q19 earnings could see some weakness amid soft CPO prices and the narrowing oleochemical margins,” it said.

Kenanga Research added that KLK’s margins in its oleochemical division have been dwindling due to competition from Indonesia coupled with a sharp drop in the crude oil prices.

“The drop in the crude oil price has made the methyl ester-based products less attractive.

“As such, we expect the group to hit a soft patch in 1Q19, potentially being the weakest quarter in FY19.

“However, we believe the results will still be broadly in line with expectations, considering that CPO prices have been recovering handsomely lately, while the fertiliser application is normally front-loaded,” it said.

KLK share price closed at RM24.70 from RM24.68 last Monday with 1.1 million shares exchanging hands with a total transaction value of RM27.53 million.