Soft earnings growth seen for palm oil planters in 2H20

by SHAHEERA AZNAM SHAH/ pic by MUHD AMIN NAHARUL

DESPITE the recent recovery in palm oil prices, local planters are expected to see soft earnings growth in the second half of the year (2H20) as businesses continue to exert caution during the tail-end of the Covid-19 pandemic.

Demand from the food sector is set to fall below supply given the cyclical nature of palm oil production, which peaks towards the end of the year.

The delayed implementation of Malaysia’s B20 biodiesel mandate has also impacted demand for the edible oil from the non-food sector.

“We see crude palm oil (CPO) prices to stay in the range of RM2,200 to RM2,300 per tonne for 2H20, given the higher inventory levels due to the seasonally higher production level,” Public Investment Bank Bhd wrote in a recent note.

The research house is ‘Neutral’ on the plantation sector, given the lack of re-rating catalysts.

It said the government’s decision to freeze all new hires of foreign labour is also a detriment to the industry, which relies heavily on foreign workers to keep production volumes high at low operating costs.

“This is definitely a big hit to the labour-intensive plantation sector as foreign labour makes up nearly 84.1% of the total workforce.

“The majority of the workers are harvesters and collectors at about 38% and field workers about 33%, considered as ‘tough’ jobs for the locals,” it added.

Last week, Human Resources Minister Datuk Seri M Saravanan said there will be no new recruitment of foreign labour for all sectors until year-end in order to prioritise hiring of locals amid rising unemployment rates.

Malaysia’s unemployment rate jumped to a 30-year high of 5% or 778,800 unemployed persons in April, a level not seen since 1990, following pandemic containment measures under the Movement Control Order.

Palm oil experts have mixed views on the price trend of the edible oil for the remainder of the year with the prices estimated to trend between RM1,800 and RM2,500 per tonne.

Taking a more bullish stance, Malaysian Palm Oil Board DG Dr Ahmad Parveez Ghulam Kadir believes CPO price could potentially hit RM2,500 per tonne due to the resumption of the B20 mandate in September 2020 and export tax exemptions.

“The industry’s performance is expected to improve in 2H20 on the basis of higher CPO production supported by the B20 programme. The current rebound of CPO prices could be sustained, supported by the government initiative to exempt export duties, thus cushioning the impact of the global economic slowdown,” he said during a recent online seminar hosted by Bursa Malaysia Bhd and the Malaysian Palm Oil Council.

Industry expert Dr James Fry said the impact of high stockpiles is a more pressing factor as he expects Malaysian palm oil stocks to surge as much as 50% to reach three million tonnes this year.

From a stock picking perspective, Public Invest favours Sarawak Plantation Bhd due to its double-digit fresh fruit bunches (FFB) production growth, attractive forward price-earnings ratio of 13 times and room for FFB yield improvement on the back of increasing harvestable areas.