Listed planters moaned of up to RM1b of possible revenue erased last year due to the price volatility

By SHAHEERA AZNAM SHAH / Pics By BLOOMBERG

It was not all shining and green for the palm oil sector. In fact, it was a year many planters want to forget.

Crude palm oil (CPO) price dropped in the final quarter of 2018 (4Q18), plunging to a three-year low in November, subsequently hurting earnings. Listed planters moaned of up to RM1 billion of possible revenue erased last year due to the price volatility.

The commodity traded between RM1,717.50 and RM2,100 during the October to December period, about RM800 lower than the highest trading price posted during the first half of last year (1H18).

Malaysia — one of the two largest palm oil producers that produced 19.5 million tonnes of palm oil last year — had also felt the pressure of rising inventories.

The low historical price, coupled with an inventory of above three million tonnes last year dampened the financials of major planters like Sime Darby Plantation Bhd, Boustead Plantations Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK).

Sime Darby Plantation

Earnings improvements in Sime Darby Plantation’s downstream segment helped to cushion the planter from an even bigger drop

The drop of CPO and palm kernel (PK) prices in 4Q18 had dented Sime Darby Plantation’s net profit. Earnings slowed to RM129 million from RM429 million in its 2Q ended Dec 31, 2018.

Its quarterly revenue slipped 14.2% year-on-year (YoY) to RM3.5 billion from RM4.09 billion.

The group said the drop in the commodity’s prices had affected all of its upstream segments, in addition to the higher finance costs.

But earnings improvements in its downstream segment helped to cushion the planter from an even bigger drop.

For its six-month performance, Sime Darby Plantation posted a net profit of RM244 million from RM1.45 billion, while its revenue fell 14.2% YoY to RM6.54 billion from RM7.63 billion.

But the drop was largely due to the absence of gains from land disposal.

Kenanga Research said the group’s revenue and net profits came within the research house’s forecast with a minor 5% positive deviation.

The research houses added that the constant evaluation of Sime Darby Plantation’s non-core assets is favourable to the group’s performance in 2019, coupled with the projection of the commodity’s prices.

“We view this positively as the investment has been constantly loss-making and RM327 million of its value has been impaired thus far. We estimate that the asset now has a carrying value of RM250 million.

“The group continues to review its non-core assets for potential disposals, including its 10,000ha of mature area in Liberia, for which decision should be made in the next three months.

“In its briefing, the Sime Darby Plantation’s management opined that immediate upside for CPO price is capped at RM2,200 per metric tonne (MT), but likely to trend up between RM2,250 and RM2,450 per MT from April onwards, driven by rising demand from China and India,” it said.

Boustead Plantations

Low palm product prices and higher interest expense were blamed for company’s financial debacle (www.boustead.com.my)

Boustead Plantations ended 2018 in the red with a net loss of RM51.78 million compared to a net profit of RM620.17 million in its financial year 2017 (FY17). Revenue contracted 23.2% to RM584.01 million from RM760.1 million.

For the October-Dececember period, the group’s net profit reported a loss of RM12.9 million against a net profit of RM22.17 million a year ago, the group’s third consecutive quarterly loss.

Low palm product prices and higher interest expense were blamed for the financial debacle.

“The pretax loss was down by RM739.9 million mainly because the previous year’s results had included a gain on disposal of plantation assets of RM554.9 million.

“At operations level, performance was impacted by the decline in selling prices, sluggish production and increasing cost,” the group said in a filing to the local bourse.

CPO was sold at an average of RM2,261 per MT during the year, translating into RM549 or 19.5% decline from RM2,810 per MT in 2017, while PK declined 29% at RM1,780 per MT.

Maybank Investment Bank Research said the group “broke its record” of paying quarterly dividends since listing as no final dividend was proposed.

“This is prudent as it reported its first full-year headline and core losses since listing on the high cost of production,” it said.

Moving forward, the research house remained conservative on its projection to the group’s FY19 performance with a lower contribution of the fresh fruit bunch (FFB) segment.

“Given its relatively older trees of an average 15 years, we conservatively project only 4% FFB growth for FY19-FY20.

“Following its financial results, we have tweaked our financial parameters which led to RM2 million to RM8 million improvement in our FY19-FY20 core PATMI (profit after tax and minority interests) forecasts.

“Apart from the subdued earnings outlook, sustainability of its high dividend payout is in question amid rising net gearing and the weak property market which may hamper efforts to monetise estates,” it said.

IOI Corp

The lower contribution from its plantation segment in addition to the forex loss dragged IOI Corp’s net profit by 67% in its 2Q19 (Pic: Bloomberg)

The lower contribution from its plantation segment in addition to the foreign-exchange (forex) loss dragged IOI Corp’s net profit by 67% in its 2Q ended Dec 31, 2018 (2Q19), to RM195.5 million from RM595.9 million a year ago.

Its revenue for the quarter was down by 6.4% to RM1.88 billion from RM2.01 billion.

Despite the weaker performance, the group declared an interim dividend of 3.5 sen to be paid on March 22, 2019.

IOI Corp said it had incurred a net foreign currency translation loss of RM22.8 million versus a gain of RM188.1 million last year, while the plantation segment was heavily impacted by the lower CPO and PK prices.

For the six-month performance, the group’s net profit contracted 65% to RM339.3 million from RM955.9 million previously, while its revenue dropped 3% to RM3.76 billion from RM3.88 billion.

Moving forward, Kenanga expects the group’s earnings to improve on the average CPO price between January and March, coupled with the
better performance of its subsidiary.

“In spite of the potential seasonal dip in FFB output, we expect further improvement in 3Q19 earnings, underpinned by a recovery in average CPO price in 3Q19.

“This is likely to be enhanced by the stronger downstream performances as the PK prices — a key raw material for the group’s oleochemical business — have not tracked CPO’s recovery.

“Furthermore, management expects improvement in the financial performance of its 30%-owned speciality fats associate Bunge Loders Croklaan, underpinned by higher product margins in Europe and the synergies arising from the integration with the larger Bunge set-up,” it said.

KLK

Despite damaging earnings for most plantation firms, KLK’s only mellowed a 6.6% increase in the 1Q ended Dec 31, 2018, to RM250.92 million from RM235.36 million a year ago.

However, revenue for the quarter contracted 21.1% to RM4.085 billion from RM5.18 billion, contributed by the plantation division’s profit.

The group said its plantation segment had plummeted 58% to RM127.5 million despite a 7.9% improvement in FFB production to 1.1 million MT.

KLK added that the selling prices of CPO stood at RM1,840 per MT, or 28.7% lower, compared to RM2,581 per MT a year ago. The PK price was RM1,375 per MT which is 45% lower than RM2,488 per MT.

Hong Leong Invest Bank Research said it considers the group’s financial performance within the expectation, while projecting the subsequent quarter to perform better.

“The group’s management hinted that the worst is behind KLK as CPO prices have recovered from the low levels in the previous quarter.

“In addition, the performance for oleochemicals will likely sustain its decent performance, underpinned by higher margins and capacity utilisation,” it said.

Kenanga Research said KLK’s earning would recover on rising CPO prices and higher FFB output, in addition to the favourable PK prices to the group’s downstream margins.

“Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks.

“The group continues to be on the lookout for acquisitions in the upstream segment, with the preference for brownfield oil palm plantations with flat and low-lying land,” it said.