KUALA LUMPUR: Maybank Investment Bank Bhd expects Malaysian planters to report much stronger YoY and QoQ core earnings largely on crude palm oil (CPO) price recovery.
It said on Wednesday that however, not all will fully benefit the price uptrend as some may have locked-in sales at average selling prices (ASPs) lower than the spot CPO ASP in 4Q19.
Those that forward sold 2020’s output aggressively may even report mark-to-market fair value (FV) losses on derivative FI as CPO price hit its peak only at end-December.
“Maintain Neutral on the sector. We upgrade TSH and Boustead Plantations (BPlant) to Buys (from Holds), and Sarawak Oil Palms (SOP) to Hold (from Sell) given recent sharp share price retracements as our EPS and TP remain unchanged, ” it said.
Commenting the 4Q19 results, it said this was the first industry wide YoY net profit recovery. Overall, it expects upstream planters to record much stronger YoY 4Q19 core profits.
On a QoQ basis, Sabah-based planters should exhibit the strongest profit growth. This follows a spike in spot CPO ASP of RM2,484/t (+29% YoY, +23% QoQ) and palm kernel ASP of RM1,454/t (+1% YoY, +25% QoQ) in 4Q19 which offsets the weaker output.
Maybank IB Research said the latest Malaysia Palm Oil Board’s (MPOB) statistics revealed a sharp dip in 4Q19 output to 4.67mt (-17% YoY, -14% QoQ).
Peninsular Malaysia which recorded very strong output in 1Q-3Q19 had the biggest YoY and QoQ decline in 4Q19 at 2.28mt (-22% YoY, -21% QoQ) while Sarawak reported the least YoY decline (-5% YoY, -14% QoQ). And while Sabah recorded a 17% YoY decline in output, it recorded a +5% QoQ growth.
“It is rather tricky to guess the performance of the refiners in 4Q19 although we expect most to report positive margins unless they aggressively sold forward when CPO price trended up.
“The overall refinery utilisation rate (UR) in 4Q19 fell to just 71% (3Q19: 75%, 4Q18: 74%; Fig.9-10), which typically translate to lower margins. But the lower utilization rate should be offset by inventory gains in 4Q19 as CPO price spiked.
“However, the unknown concern is whether refiners (or their trading arms) aggressively enter into forward contracts during the uptrend. Under the accounting rules, companies with locked-in forward sales at prices below that of the last day of 4Q19 will likely report mark-to-market FV losses on FI in 4Q19, ” it said.
The research house pointed out 2019’s CPO price happens to peak on the last day of 2019. Likewise, it also expects the oleochemical players (such as IOI and KLK) to enjoy another quarter of decent margins in 4Q19 but likely to be lower QoQ evidenced by the lower average industry plant utilisation rate of 96% (3Q19: 105%, 4Q18: 98%).
“In a CPO price recovery, purer upstream planters will tend to report better earnings recovery relative to integrated players.
“For 4Q19, we believe purer Sabah and Sarawak based planters, and those with presence in Kalimantan should outperform peers.
“For companies with high US$ debt exposure such as IOI and TSH, we expect their bottoms line to be lifted by unrealised forex gain as the ringgit and rupiah strengthened by 2.3% against US$ in 4Q19. Our CPO ASP forecast for 2020 is unchanged at RM2,300/t, ” it said.
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