The tiff with the EU over how ‘green’ Malaysia’s commodity is will prolong with no simple solution in sight, says HLIB

By SHAHEERA AZNAM SHAH / Pic By TMR

The European Commission’s decision to exclude biofuel derived from palm oil as not being “green” had dragged local listed planters and dimmed prospects, despite the government promised to fight any move to outlaw the commodity.

On March 14, the European Commission concluded the cultivation of palm oil results in excessive deforestation and opposed the European Union’s (EU) renewable and sustainable transport directive.

A check on Bloomberg data showed 21 out of 42 plantations and plantation-related companies listed on the local bourse lost more than RM2 billion in market capitalisation.

The tiff with the EU — over how “green” Malaysia’s commodity is — is expected to prolong with no simple solution in sight even if the economic bloc agrees to push forward the agenda.

Hong Leong Investment Bank Bhd (HLIB) believes the EU’s proposal to cut off the importation of palm oil by the bloc will be a long-drawn affair as the rectification processes are needed for individual countries.

“We believe the EU’s proposal to ban palm oil will likely be a long-drawn affair, as the EU committee will still need to rectify the law with the individual countries within the EU,” it said in a research note recently.

The research house said the decision would have an adverse impact to the commodity’s prices in the near to medium term, but will subside over the longer term.

“Should the proposal succeed in getting the consensus to ban palm oil, this will have an adverse impact on palm oil prices in the near to medium term.

“It will be difficult for both producing countries to increase exports of palm oil to other importing countries significantly within a short time span in order to fill the vacuum from the EU.

“Over the longer term, we believe the impact will be less detrimental, as lower palm oil price will widen the price gap between palm oil and other competing vegetable oils, hence, boosting palm oil demand from palm oil-consuming countries outside of the EU,” it said.

Among the listed plantation firms who have been rated ‘Hold’ by the research house are Kuala Lumpur Kepong Bhd (KLK), Sime Darby Plantation Bhd, Genting Plantations Bhd and TSH Resources Bhd.

Meanwhile, HLIB has recommended a ‘Sell’ for FGV Holdings Bhd, IOI Corp Bhd, IJM Plantations Bhd, United Malacca Bhd and Hap Seng Plantations Holdings Bhd.

The research house maintains its forecast on crude palm oil (CPO) prices of RM2,300 per tonne for 2019 and RM2,400 per tonne for 2020, slightly lower than the average price in 2018 of RM2,235 per tonne.

As of last Friday, IOI Corp has lost the most market capitalisation with RM480 million erased since the EU announced its directive. Its share price has down 1.54% from RM4.54 to RM4.47 at the closing last Friday.

In its recent financial result ended Dec 31, 2018, IOI Corp’s net profit slumped 68% in its second quarter this year (2Q19) from RM595.9 million to RM195.5 million a year ago.

IOI Corp’s revenue fell 6.4% to RM1.88 billion from RM2.01 billion. Its plantation segment profit fell 66% to RM117.3 million from RM340.9 million a year ago.

The group attributed the lower profit to the lower CPO and palm kernel (PK) prices realised, which were at RM1,932 and RM1,444 relatively
during its 2Q.

The second-largest drop in market value was  KLK, with its share price falling 20 sen to RM24.80 on last Friday’s closing, dragging its market capitalisation RM190 million lower to RM26.43 billion.

In KLK’s 1Q19 financial performance, its plantation recorded a lower profit of RM336.4 million, a 58% decrease, despite a 7.9% improvement in fresh fruit bunch production.

Another decliner is Batu Kawan Bhd as its share price shed 1.97% from RM17.18 to RM16.84. Its market capitalisation was dragged by RM150 million, from RM6.81 billion to RM6.66 billion.

In Batu Kawan’s 1Q ended Dec 31, 2018, its plantation segment was 59% lower at RM128.39 million while the company’s revenue dropped 30.7% to RM1.96 billion due to the weaker CPO and PK selling prices.

Hap Seng Plantations’ market capitalisation shed RM220 million from RM1.54 billion after the palm oil directive was announced to RM1.32 billion last week. Its share price lost 14.5% or 28 sen from RM1.93 to RM1.65 last Friday.

Hap Seng Plantations’ net profit for its 4Q slumped 73.9% from RM23.31 million in the previous year to RM6.07 million, while its revenue also fell 43% to RM96.09 million.

The plantation firm said it was affected by the lower average selling price realisation of CPO and PK, as well as the lower sales volume of CPO.

For IJM Plantations, its share price has shed 6.6%, or 11 sen, from RM1.66 to RM1.55 last Friday, dragging the firm’s market capitalisation RM100 million lower, from RM1.46 billion to RM1.36 billion.

IJM Plantations’ 3Q financial result ended Dec 31, 2018, recorded a loss of RM1.98 million in net profit, while its revenue dropped 36.46% from RM224.8 million to RM142.8 million.