Better earnings expected in 3Q for plantation firms, say UOB KayHian Research

KUALA LUMPUR : Malaysiam plantation companies are expected to report an uptick in earnings during the third quarter period (3Q16) as the increase in crude palm oil (CPO) production will outweigh the marginal decrease in CPO prices, said UOB KayHian Research.

 

In a note today, the research house believe that exports of CPO are likely to improve on festive demand and the widening gap between CPO and soybean oil.

 

“While exports to India fell by 40% on a month-on-month (m-o-m) basis in September, we believe the figure will improve ahead of the festive season in end-October and on stock replenishment,” said UOB KayHianwhich has maintained its 'market weight' call for the plantations sector.

 

For the month of September, Malaysia's palm oil inventory rebounded to 1.55 million tonnes primarily due to lower exports and domestic consumption.

 

Despite the marginal decrease in CPO prices on a quarterly basis for 3Q16, UOB KayHian believes that this will be offset by production increasing by 6.8%, which indicates that upstream players are likely to report better earnings during this period.

 

“Sabah and Sarawak players could outperform as production rose by 10.4% and 10% respectively quarter-on-quarter (q-o-q) compared to Peninsular Malaysia's 3.5% q-o-q rise. Within our coverage, Sarawak Oil Palms Bhd and TH Plantations Bhd have large exposure to Sarawak, while the estates of Genting Plantations Bhd, IOI Corp Bhd and IJM Plantations Bhd are mostly in Sabah,” it said.

 

UOB KayHian prefers Kim Loong Resources Bhd as its top pick in the sector as its earnings growth is supported by positive fresh fruit bunch (FFB) production growth, good milling margins from a high oil extraction rate and extra income from value added products.