By companies, HLIB forecasts FGV Holdings Bhd’s core earnings to be higher in 2Q22 on the back of higher FFB output and higher palm product prices.
KUALA LUMPUR: How plantation companies perform financially in the second quarter of this year (2Q22) will depend on their exposure to the upstream business in Malaysia and Indonesia, says Hong Leong Investment Bank (HLIB).
HLIB expects planters with significant upstream exposure in Malaysia to post flat to higher sequential performance in 2Q22 on the back of higher fresh fruit bunch (FFB) output and palm product prices.
It added that planters with significant exposure to Indonesian estates are anticipated to post a weaker performance in 2Q22 due to the export restrictions imposed by Indonesia which would weigh down on sales volumes.
Another key driver that would boost year-on-year upstream earnings of planters in the period is the higher crude palm oil (CPO) price, which will more than mitigate the higher production cost and lower FFB output.
By companies, HLIB forecasts FGV Holdings Bhd
’s core earnings to be higher in 2Q22 on the back of higher FFB output and higher palm product prices.
Although Hap Seng Plantations Holdings Bhd reported a quarter-on-quarter decline in FFB output, the research firm expects the group to post a flat or marginally higher earnings in 2Q22, as the lower FFB output would be mitigated by higher palm product prices.
“For exposure, we prefer integrated players such as Kuala Lumpur Kepong Bhd and IOI over purer upstream players, as earnings of integrated players tend to be better insulated amidst the volatile palm product price trend,” HLIB said.(File pic shows KLK plantation)
IOI Corp Bhd’s core earnings are expected to improve in 2Q22, driven by better performance from its upstream segment arising from marginally higher FFB output and palm product prices, opined HLIB.
“There is expected to be better performance in the downstream segment arising from a recovery in palm refining and fractionation margins, as well as healthy margins at the oleochemical sub-segment,” it said.
That said, HLIB is keeping an “overweight” stance on the plantation sector supported by an anticipated recovery in the CPO price and commendable valuations.
“For exposure, we prefer integrated players such as Kuala Lumpur Kepong Bhd and IOI over purer upstream players, as earnings of integrated players tend to be better insulated amidst the volatile palm product price trend,” it said.
Bursa Malaysia-listed planters will start reporting their quarterly results starting from Aug 17.
HLIB added that the recent severe CPO price decline was overdone, as supply prospects of major vegetable oil remained uncertain and demand prospects have turned more favourable due to palm oil’s improved price competitiveness, low inventory levels among major importing countries as well as the favourable palm oil-gas oil spread.
It is noteworthy that the CPO price has recovered from its low of RM3,677 per tonne in mid-July to RM4,127 per tonne, bringing its year-to-date average price to RM5,966 per tonne. “Hence, we maintain our 2022 to 2024 CPO price assumptions of RM5,500, RM4,500, RM3,800 per tonne, respectively,” it said.
