PETALING JAYA: Local planters are expected to post better results in the second quarter of 2017 (Q2’17) on improved earnings following the recovery in crude palm oil (CPO) output, according to analysts.
CIMB Investment Bank Bhd said planters would likely deliver marginally higher earnings in Q2’17 on the back of an 18% rise in CPO production, which would more than offset the 13% drop quarter-on-quarter (q-o-q) in CPO prices.
Plantation earnings in Q2’17 are also expected to be stronger year-on-year (y-o-y) due to a higher output of 12% and a 5.6% increase in CPO selling prices at RM2,747 per tonne, it said in its latest report.
CIMB, which has a “neutral” call on the sector, however, said the current CPO price may not be sustainable in the second half of the year.
“Key upside risks to our rating are higher CPO prices and output, while the downside risks are weaker demand for palm oil and slower new plantings,” added CIMB.
Its selective top picks included Sime Darby Bhd , given a potential share price re-rating on the back of higher commodity prices, and plans to demerge and list its plantation and property divisions.
This is followed by First Resources Ltd for its well-managed and young estates, as well as PT Astra Agro Lestari Tbk for its strong corporate governance and attractive valuation.
UOB Kay Hian in its latest report said plantation companies are expected to report better q-o-q and y-o-y results in Q2’17.
Based on the production data, Sabah reported the largest q-o-q increase in production versus Sarawak and Peninsular Malaysia in Q2’17. UOB Kay Hian said plantation stocks under its coverage, namely, Genting Plantations Bhd , IJM Plantations Bhd and IOI Corp Bhd have the highest exposure to Sabah.
It also expected a better average refining margin q-o-q and y-o-y in the quarter under review. The average refining margin increased to an average of RM79 per tonne in Q2’17 compared with RM18 per tonne in Q1’17.
Hence, companies with downstream exposure such as Kuala Lumpur Kepong Bhd (KLK) and IOI Corp were likely to benefit from the positive refining margin.
MIDF Research, meanwhile, has a “buy” call on KLK, TSH Resources Bhd and Ta Ann Holdings Bhd .
“We expect strong production in the second half of the year to cap the CPO price upside,” said the research unit, which likes KLK for its resilient earnings and good fresh fruit bunch (FFB) production growth estimated at 8%, which is said to be the highest among the index-linked plantation stocks.
MIDF also favoured TSH due to its strong Q1’17 core net profit, which grew 71% y-o-y, attractive valuation at 17.8 times price earnings and its young palm tree age profile, which would enable the company to register better FFB growth in the long run.
As for Ta Ann, the growth in its plantation earnings should remain strong due to a higher FFB volume expected at 10%, while the timber division is expected to remain profitable due to the support from high export log prices.