Strong Q4 results despite accounting wrinkle


Steady market: People work at an oil palm estate in Melaka. With low brought-forward stockpile and current seasonal low output, CPO prices will stay lofty in the first quarter.

PETALING JAYA: Forward sales could likely dampen palm planters’ highly anticipated stronger set of results in the fourth quarter of 2020.

Maybank Investment Bank (Maybank IB) Research expects those with forward sales, depending on the size and price locked-in before Dec 31,2020 for delivery in 2021, to see some accounting fair value (FV) losses on derivative financial instruments (FI).

“However, these accounting FV losses will likely reverse and be recognised as accounting profits in 2021, ” the research unit said in its plantations’ fourth quarter 2020 results preview.

Under the accounting rules, companies that locked-in forward sales at prices below that of the last day of fourth-quarter 2020 will likely report mark-to-market FV losses on FI in the fourth quarter of 2020.

On the other hand, Maybank IB pointed out that high prices of CPO and palm kernel (PK) were key factors to strong fourth quarter 2020 results by plantation companies.

The upcoming fourth-quarter 2020 year-on-year (y-o-y) profits are likely to be lifted by high selling prices of CPO and PK, which should more than offset a marginally weaker y-o-y output.

“For planters with US dollar debts, foreign exchange translation gains will likely lift the headline profits, ” said the research unit.

Maybank IB also expects the plantation industry to deliver its fifth consecutive y-o-y profit growth for the fourth quarter of 2020.

“This will be underpinned by higher CPO spot prices, which averaged RM3,373 per tonne, up 36% y-o-y and rose 22% quarter-on-quarter (q-o-q) in the fourth quarter of 2020, ” it noted.

The research unit pointed out that the high prices of CPO and PK will likely benefit the small and mid-sized caps relatively more, given “their pure upstream exposure and relatively higher cost of production.”

Hence, the small and mid-sized caps have higher operating leverage in a rising CPO price environment compared with the large caps.

With low brought-forward stockpile and current seasonal low output, Maybank IB said “CPO prices will stay lofty in the first quarter of 2021 to ration demand.”

The research unit’s top local picks include Kuala Lumpur Kepong Bhd (KLK), Sarawak Oil Palms Bhd and Boustead Plantations Bhd.

While upstream growers will do well in fourth quarter 2020, it pointed out that planters with higher exposure in Malaysia will generally perform better than those with higher exposure to Indonesia.

“This is because Indonesia changed its CPO export tax structure to progressive tax structure in December last year to raise funds for its B30 mandate.

“This has had the unintended effect of capping the CPO price net proceeds for Indonesia’s upstream at around RM2,800 per tonne, ” it said.

On the downstream operations, Maybank IB said the refining margins could come under pressure in the fourth quarter of 2020, given the low utilisation rates as Malaysian refinery utilisation rates fell sharply to 62% y-o-y.

Malaysian exporters also exported more duty-free CPO in the fourth quarter of 2020, ahead of the re-imposition of CPO export duty at 8% on Jan 1 this year.

Meanwhile, Bernama reported that Khazanah Research Institute (KRI), based on its study, found out that labour shortage is more detrimental to both estates and smallholders in Malaysia’s oil palm industry than a global price drop.

The study on “The Implications of the Dominant Shift to Industrial Crops in Malaysia: System Dynamic Model of Industrial Crops” said a 30% reduction of labour from the current level would see production fall by half, and a further 80% would lead to a system collapse as production reached only 20% from the business-as-usual level.

“Therefore, a Covid-19 outbreak among the migrant workers in the oil palm estates could prove detrimental.

“As such, industry players must be vigilant in ensuring the adherence to Covid-19 standard operating procedures, improve workers’ accommodation and adopt digitalisation to minimise menial processes, ” said Prof Datin Paduka Fatimah Mohamed Arshad, the lead author of the study and visiting senior fellow of KRI.

The study also revealed that Malaysia’s oil palm planted area was nearing its ceiling limit of 6.5 million hectares (ha), with 5.9 million ha belonging to large estates while 986,000 ha (17%) was owned by smallholders in 2019.

It showed that to reduce the dependence on land, there was a dire need for the oil palm industry to improve yield, expedite replanting and reduce non-labour input cost to increase production and revenue.

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Palm oil , CPO , price , palm kernal , results ,

   

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