Planters get apprehensive as CPO prices fall


PLANTERS will likely face tough sales and operational conditions following the drastic fall in crude palm oil (CPO) prices, which had been trading below RM2,300 per tonne level in recent weeks.

The commodity is currently trading at a two-year low of RM2,271 per tonne as the bearish market sentiment continues to be undermined by weak export outlook on the back of high palm oil stocks, rising production and planters’ escalating cost of production.

According to analysts, planters are getting apprehensive as their profit margins in the coming quarters will likely be eroded by weaker CPO prices and rising cost of production, particularly from the higher minimum wage policy.

The earnings of plantation companies are dependent on stable CPO prices.

For every RM100 per tonne change in the CPO price could result in an “addition” or “reduction” of about RM250mil to Sime Darby Plantation Bhd while for Felda Global Ventures Holdings Bhd, it would be an “addition” or “reduction” of RM100mil.

But, the earnings sensitivity to CPO price movement are mostly lower among big planters with diversified upstream and downstream businesses.

Analysts point out that IOI Corp Bhd earnings’ sensitivity is at about 5.8%, Kuala Lumpur Kepong Bhd (KLK) at 6.9%, Sime Darby at 7.4% and Ta Ann Holdings Bhd at 8.6%. Given the bearish fundamentals, analysts are revising downwards their average CPO price forecast to RM2,300-RM2,400 per tonne for 2018 from their earlier targets at RM2,500-RM2,600 per tonne.

This compares with the average CPO price of RM2,815 per tonne recorded in 2017.

At the same time, planters’ cost of production will be on the rise.

In Peninsular Malaysia, the efficient planters’ average cost of production are between RM1,400 to RM1,500 per tonne compared with less-efficient or new planters in Sarawak, whose cost of production could be as high as RM1,800-RM2,000 per tonne.

UOB Kay Hian Securities, in its recent report, says there will be cost pressure from the rising minimum wage.

“East Malaysian planters face potential cost pressure as there is a plan to synchronise the minimum wages of Sabah and Sarawak (RM920) with that of Peninsular Malaysia (RM1,000).

“This could increase cost of production by 2%-5% for planters with East Malaysia exposure. On top of that, Pakatan Harapan’s manifesto to raise the minimum wage to RM1,500 could add 5%-11% to cost of operation,” adds the research unit.

Meanwhile, CIMB Equities Research says India’s recent hike in import duties of other edible oils to be slightly positive for palm oil demand in India as “it partially restores CPO price competitiveness in India.”

However, it does not expect demand (for palm oil) to pick up significantly in view of the high stock of edible oils at the various ports in India as at June 1, 2018.

“In our view, the weak palm oil demand from India due to higher import duties has been a key factor contributing to the 6% year-to-date drop in spot CPO prices.

“The weaker CPO price, coupled with the 8% year-on-year drop in CPO production by local planters in May, is likely to lead to Malaysian planters reporting weak second quarter 2018 forecasted earnings,” adds the research unit.

In view of the unexciting near term earnings prospects, CIMB Equities Research is keeping a “neutral” rating on the plantation sector. Kenanga Investment Research has also reiterated a neutral call on the sector.

It says the bleak upside prospects, given ample supply, is offset by minimal downside risk due to supportive crude oil prices.

“Our FY2018 CPO price forecast is unchanged at RM2,400 per tonne and we update our trading floor basis to a premium on crude oil (previously gasoil basis, which is now irrelevant as CPO prices are now trading at a discount to gasoil) of US$30 per tonne.

“This represents a trading floor price of RM2,290 per tonne.

“Our CPO price cap is lowered to RM2,450 per tonne (from RM2,500 per tonne) based on unchanged soybean oil discount of US$60 per tonne.”

Kenanga Investment Research also continues to like defensive integrated names such as IOI Corp and PPB Bhd via its integrated associate Wilmar International Ltd, as well as Sime Darby Plantation and KLK.

In the current volatile market environment, the research unit expects these companies to see good share price stability and mild long term downside given that “their integrated manufacturing operations should benefit from lower CPO and palm kernel prices due to lower input costs.”

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3

Business , CPO

   

Did you find this article insightful?

Yes
No

Next In Business News

TDM says CEO Zainal Abidin resigned over disagreement with chairman�
Petronas posts RM3.4bil net loss in Q3
Boustead appoints former Telekom boss Shazalli Ramly as new Group MD
Public Bank 3Q net profit higher at RM1.39b
CIMB's 3Q pre-tax profit improves sequentially on higher operating income
Kenanga IB profit up tenfold as brokerage, trading income soar
Palm oil’s stunning rally is set to boost supermarket prices
Alliance Bank posts lower 2Q net profit of RM103.94m on higher reserves
Pandemic and travel curbs hit Datasonic Q2 earnings�
Higher net profit for Hong Leong Bank

Stories You'll Enjoy