THE current steep crude palm oil (CPO) price trading above RM3,000 per tonne and the lower palm oil inventory are positive profit indicators for oil palm plantation companies moving into year 2017.
But analysts say that local planters’ profit margins this year could be undermined by escalating production costs, particularly in fertilisers, due to the weakening ringgit against the US dollar, the full-year impact of minimum wages and uncertain export markets outlook.
This year, local planters could stand to gain from the CPO average selling prices of between RM2,500 and RM2,800 per tonne – albeit almost the same level as last year, according to analysts.
This is on the back of efficient planters’ average cost of production between RM1,400 to RM1,500 per tonne compared with less-efficient or new planters, whose cost of production could be as high as RM1,800 per tonne.
Among the plantation companies, a mere RM100 increase in the CPO price per tonne could translate into additional “hefty” contributions to group profits.
According to Maybank Kim Eng in its latest regional plantations report, companies which are most sensitive and leveraged to the CPO price movement with relatively higher cost of production per tonne include TH Plantations Bhd, Felda Global Ventures Holdings Bhd (FGV) and Boustead Plantations Bhd.
For every RM100 per tonne change in CPO prices, TH Plantations’ earnings sensitivity is the highest at about 28.8% followed by FGV at 28.6%, Boustead Plantations 21.8% and Sarawak Oil Palms Bhd 14.2%, says the research unit.
Maybank Kim Eng points out that the earnings sensitivity to CPO price movement are mostly lower among big planters with diversified upstream and downstream businesses.
IOI Corp Bhd earnings sensitivity is at 5.8%, Kuala Lumpur Kepong Bhd at 6.9%, Sime Darby Bhd at 7.4% and Ta Ann Holdings Bhd at 8.6%.
Sime Darby had said that every RM100 per tonne change in the CPO price could result in an “addition or reduction of about RM250mil” to its group profit while for FGV, it could result in an additional or reduction of about RM100mil.
Maybank Kim Eng also envisaged that large-cap plantations would continue to benefit from syariah-complaint status.
“Large-cap index-linked within the sector have benefitted from the changing investment landscape in Malaysia, where there has been a growing emphasis on syariah-complaint stocks.
“And the Employees Provident Fund has joined the bandwagon as it launched an RM100bil syariah retirement savings fund for contributors effective this month as a start,” adds the research unit.
Maybank Kim Eng also suggests focusing on small laggards such as Sarawak Oil Palms and Boustead Plantations.
“We believe Budget 2017 announced mandate to fund proper research for small-cap to mid-cap stocks in 2017 will benefit the non-large cap plantation stocks, given their valuation gap.”
Its sector “buys” are Sarawak Oil Palms and Boustead Plantations. Boustead Plantation, for example, has high dividend yield of 7.8%.
While Maybank Kim Eng has no “buy” recommendations among the large caps due to their steep valuations, it believes Sime Darby offers the best trading opportunity in the first half of 2017 due to its liquidity, good proxy to recent CPO price rally and ongoing initiatives to enhance shareholders’ value.
Meanwhile, JF Apex Securities in its 2017 outlook report has estimated 2017 CPO average price at RM2,580 per tonne.
“We expect the CPO average selling price in the first half 2017 to be at RM2,818 per tonne. It will range from RM2,637 to RM2,921 per tonne in view of the persistence low inventory level despite gradual recovery of production from the weak spell.
“We anticipate inventory levels to stock up in the second half as a result of recovery from the weak spell effect on production, coupled with seasonal higher production in the second half of the year.”
It points out that profit margin in the plantation sector notched up 50 basis point in 2016 compared with 2015.
“Looking forward, we expect margins to remain at the same level after taking account slight increase in CPO average selling prices in 2017 despite recovery in production, coupled with higher fertiliser cost in view of weaker ringgit and a full-year impact of minimum wages.”
The minimum wages implemented on July 1 last year saw RM1,000 for Peninsular Malaysia and RM920 for Sabah and Sarawak.
JF Apex says the minimum wages will put pressure on the manpower-driven plantation sector.
“And we see the implementation of minimum wages will erode planters’ margins.”
Another factor to pressure planters’ margin is the higher fertiliser cost.
“A weak ringgit that is floating around RM4.35 to the US dollar caused the increase in fertiliser cost.
“As the fertiliser cost makes up 25%-50% of palm oil production cost, the weaker ringgit has lifted the cost of production in plantation companies, exerting downward pressure to the margins,” adds the brokerage.