Lower CPO prices are expected to be a drag on upstream earnings of most planters under HLIB Research’s coverage as seasonally higher FFB output is offset by significantly lower palm product prices.
PETALING JAYA: Beseiged by the lower crude palm oil (CPO) prices, most planters will likely register weaker performances for both quarter-to-quarter (q-o-q) and year-on-year (y-o-y) in their upcoming results to be announced, from next week.
According to Hong Leong Investment Bank (HLIB) Research, most plantation companies under its coverage are expected to post a y-o-y decline in their upstream earnings.
“This is on the back of lower fresh fruit bunch (FFB) output and palm product prices, coupled with higher production costs arising mainly from the full impact of the minimum wage hike in Malaysia and higher fertiliser prices,” HLIB Research said yesterday in its third quarter of 2022 (3Q22) results preview on the plantation sector.
Of the seven plantation companies under its coverage, HLIB Research noted that only one planter registered positive growth in its FFB output.
On a q-o-q basis, lower CPO prices are expected to drag the upstream earnings of most planters under HLIB Research’s coverage as seasonally higher FFB output by 3.7% to 26.8%, is offset by significantly lower palm product prices, the research house added.
Zooming in on selected individual planters, HLIB Research projected that Kuala Lumpur Kepong Bhd
’s (KLK) core earnings will likely come in lower in 3Q22.
The group’s higher FFB output, mainly from the contribution of newly acquired subsidiaries and the inclusion of earnings from its 26.3%-owned Synthomer, will likely be offset by lower palm product prices, the impact from the minimum wage hike and the challenging operating environment in the downstream segment, said HLIB Research.
With regards to IOI Corp Bhd, HLIB Research also expects the group’s core earnings to come in lower in 3Q22 as “the 8.9% FFB output growth will likely be offset by lower palm product prices and a potentially weaker contribution from the manufacturing segment.”
On the other hand, the research house noted that planters with high exposure to the upstream operations in Indonesia will likely fare better than those with high exposure in Malaysia, given the changes in the export levy structure and possibly, higher FFB output.
As for the integrated plantation players, HLIB Research has pegged volatile feedstock prices, coupled with elevated freight costs to hinder profitability at the downstream segment.
Having said that, the research house maintained its CPO price forecasts at RM5,050 for 2022, RM4,000 for 2023 and RM3,800 per tonne for 2024.
“We believe the CPO price will be sustained above RM4,000 per tonne over the next few months, possibly until 1Q23. It could start trending downward from 2Q23.
“This is on the back of better supply visibility for vegetable oils arising from easing labour shortage in Malaysia and absence of weather anomalies, the heightened risk of a global recession and inventories built up in key palm oil importing countries,” HLIB Research added.
HLIB Research also maintained an overweight stance on the plantation sector, supported by commendable valuations and high near-term CPO prices.
For exposure, its top picks are KLK with a “buy” call at a target price (TP) of RM27.27 and a “buy” call on IOI with a TP of RM4.65.
