Fitch: Higher CPO prices expected next year

CPO prices have picked up significantly since October 2019 due to demand growth which has outstripped production


THE palm oil sector’s outlook is rated ‘Stable’, with the average crude palm oil (CPO) prices is expected to be higher next year, according to Fitch Ratings Inc.

Fitch director Akash Gupta said the CPO prices have picked up significantly since October 2019 due to demand growth which has outstripped production in recent months.

The Malaysian Reserve (TMR) reported on Monday that analysts have predicted the prices to extend between RM2,700 and RM2,800 per tonne until early next year.

Based on the Malaysian Palm Oil Board (MPOB) website, the locally delivered CPO was traded at an average price of RM2,587 per tonne on Nov 26, 2019.

“Fitch forecasts this improving demand-supply balance to push the average CPO price higher in 2020.

“This will drive higher Ebitda and lower leverage for palm oil companies, but the credit profiles of rated companies are unlikely to change significantly as other risks remain,” Gupta said in a note yesterday.

“We expect the demand-supply balance to continue to improve. Higher prices should enable companies to boost earnings and reduce leverage, although larger investments and dividends could keep free cashflow (FCF) negative,” the ratings agency said.

Fitch added that with the FCF to remain negative, leverage ratios are expected to be lower next year, which will result in higher debt.

“Higher Ebitda should be driven by better prices for CPO and refined oils, with output likely to be stagnant or decline.

“Operating costs should continue to rise, mainly on account on labour wage increases, but we expect better price realisations to result in wider Ebitda margins,” it said.

The company also said the wider Ebitda margins and lower leverage means companies focusing on upstream operations will benefit more.

“This is because most of the value and price-related risk is captured by the upstream operations, while refining usually earns more stable and significantly thinner margins,” it said.

The benefit from Ebitda, however, will be partially offset by higher investments in working capitals due to revenue rise and potentially higher dividends on an improved earnings outlook.

“Capital expenditure may also increase if companies choose to accelerate replanting or increase processing capacity.

“We, therefore, estimate FCF to remain negative, although outflow levels are likely to decline. However, positive FCF for producers is probable if CPO prices jump sharply,” it said.

The ratings agency also added that there has been no significant acquisition-related outflows during the year, and therefore, there has been no anticipation for a jump next year.

However, acquisitions remain a longer-term risk given the limited availability of unplanted land for companies to expand.

Meanwhile, it also expected ratings to remain ‘Stable’, following the downgrades of Sime Darby Plantation Bhd (SDP) and PT Sawit Sumbermas Sarana Tbk (SSMS), both down to BBB and Brespectively.

“SDP’s rating factors in deleveraging over the next two years due to higher Ebitda and inflows from asset disposals, but these sales may be delayed by unfavourable market conditions.

“SSMS, which focuses on the upstream segment, should benefit materially from higher prices. However, losses at other businesses and outflows from related-party transactions could continue to exert pressure on cashflow,” it said.