PETALING JAYA: There are mixed views on how plantation companies’ earnings will fare in the coming months given the weaker crude palm oil (CPO) prices and the solid recovery in palm oil production from the first quarter of this year.
Analysts said there would not be any near-term negative impact on plantation companies’ earnings, although several of them have either downgraded or kept a neutral rating on plantation stocks due to the weakening trend of CPO prices going into 2018.
While Public Investment Bank analyst Chong Hoe Leong has projected CPO prices to be around the RM2,500-per-tonne level for the whole of this year, prices could drop to RM2,300 to RM2,400 in the coming months on rising production.
“This is because beginning June, most of the oil palm trees have been experiencing a high production cycle, while demand has normalised.
“Inventory is expected to inch upwards at around 1.8 million tonnes by year-end,” he told StarBiz.
Year-to-date, CPO prices have averaged around RM2,943 per tonne.
Chong said the impact on plantation companies’ earnings would be minimal, as this would be cushioned by the steady palm oil production.
Overall, the market has projected the country’s CPO production to rise from between 19.5 million and 20 million tonnes this year, according to the analysts.
Chong explained that palm oil exports had climbed to the highest level since last August, as demand rose ahead of Ramadan.
Exports registered a 17.3% growth – the strongest in nine months.
“When CPO prices are low, we have seen major CPO consuming countries such as India and Pakistan buying more.
“As such, for this year, I do not foresee that there would be much of an impact on plantation companies’ earnings, as they have performed well in the first quarter and the trend is expected to continue in the second quarter as well,” he noted.
Chong pointed out that should CPO prices remain at the RM2,300 to RM2,400 levels, then the impact on earnings would be more significant.
Meanwhile, OCBC Bank economist Barnabas Gan has downgraded the CPO price outlook to RM2,250 per tonne at year-end from an RM2,650 forecast in May.
He believed that prices could decline further from now on as indicated by the leading indicators, especially seen from the Oceanic Nino Index.
“Weather conditions are known to influence palm oil prices and though weather experts agreed that there were no active El Nino or La Nina patterns as of June 2017, the chance of another weather extremity event remains elevated between 35% and 50% for the year,” he said.
For now, he expected that on top of very persuasive drivers for lower CPO prices, the path of least resistance would likely be one of a bearish palm oil case.
UOB Kay Hian has downgraded plantation stocks to “market weight” due to softening CPO prices that could linger onto next year on higher palm oil production.
The research house said demand has not been able to absorb the additional supply amid stiff competition from soybean supplies.
“We trim our 2018 CPO average selling price assumption to RM2,400 from RM2,500,” UOB Kay Hian said.