Weak CPO price to hurt earnings; rising stockpile and production to affect sentiment
A BUMPY ride ahead is envisaged for plantation companies as their earnings are expected to be dragged down by weaker average crude palm oil (CPO) selling prices.
The price of CPO, which has fallen by about 14% year-to-date, is currently trading below the RM2,000-per-tonne mark.
Market sentiment also continues to be undermined by rising stockpiles of palm oil and higher production.
According to OilWorld estimates, world palm oil production this year will hit a record 60.7 million tonnes, thus contributing to a surge in the stock-usage ratio.
Singapore-based Nomura Research, in its latest report, expects a weak second quarter 2015 (Q2) results for Malaysian plantation companies.
“In the last few weeks, Indonesia and Singapore plantation companies have released their Q2 results.
“All of the companies under our coverage reported results that were below market expectations, due mainly to the weaker average selling prices.”
The research unit expects a similar trend for Malaysian plantation stocks that will report earnings next week, given the estimates for production growth of 5% to 10% per annum will be insufficient to offset the impact of weaker CPO prices due to slower demand growth and gradual increases in inventory levels.
Nomura Research is negative on the Asean plantation sector due to the unattractive valuations at average financial year 2016 forecast price/earnings of 15.7 times and price-to-book at 1.6 times versus an unexciting financial year 2014-2017 (forecast) net earnings compounded annual growth of 9%.
This is followed by slow CPO price recovery due to a high stock-usage ratio and a weak macro outlook with slowing China demand, lower crude oil price that make biodiesel unprofitable and a strong US dollar, which is negative for commodity prices.
Nomura Research expects flat CPO prices in 2015-2016 with an estimated average price of RM2,200 per tonne this year.
Kenanga Research also expects plantation companies in the upcoming reporting season to post mixed year-on-year financial results due to lower CPO prices.
“We observe that quarterly CPO growth for Malaysia at 39% far exceeded the CPO price decline of 3% to RM2,194 per tonne, indicating that planters should report better upstream performance against the historically weak first quarter.
“However, year-on-year fresh fruit bunches (FFB) growth averaged 10%, which was below the CPO price decline of 15%. Thus, we expect most planters to report softer earnings and margins year-on-year in the coming results season,” the research unit says in its latest plantation sector report.
With mixed results likely in the upcoming reporting season, Kenanga advised investors to be selective and lean towards pure planters with younger average tree age and stronger FFB growth to offset lower CPO prices.
Industry expert M.R. Chandran says inefficient planters with cost of production (COP) of above RM1,500 to RM2,000 will face tremendous pressure to maintain their operations when CPO prices dwindle between RM1,997 and RM2,000 per tonne.
The production cost among Sabah planters is estimated at about RM1,300-RM1,400 per tonne of CPO while Sarawak planters’ COP is pegged at RM1,600 per tonne.
As for efficient planters with average COP of between RM1,200 and RM1,300 per tonne, he is optimistic that plantation companies which are mainly in the Peninsular Malaysia will still be able to generate about RM700 to RM800 per tonne CPO as profit margins.
Sime Darby Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd and United Plantations Bhd are among the efficient planters with production costs, which are lower than the industry’s average of between RM1,450 and RM1,500 per tonne.
For Sime Darby, every RM100 per tonne change in the CPO price would result in an “addition or reduction of RM250mil” to the group’s profit.
Another factor worth mentioning is that the stronger US dollar versus ringgit and rupiah currently.
The stronger US dollar is normally good news for Malaysian and Indonesian plantation companies as they receive more revenue in their local currencies with palm oil being traded in US dollar, says a plantation analyst.
The bulk of the planters’ costs of about 60% to 70% is in the local currencies.
Hence, profit margins should improve if CPO prices remain flat in US dollar.
On the other hand, plantation companies that have taken up significant US dollar debt will need to report unrealised translational forex losses.
“Although these forex losses items are non-cashflow, it will make the profit and loss account of the affected plantation companies less desirable,” adds the analyst, who expects IOI Corp and Sime Darby to report the largest unrealised translational forex losses.
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