The price of CPO has a greater effect on planters’ earnings than output growth, says RHB Research.
PETALING JAYA: The earnings trend for planters in Malaysia and Indonesia for the upcoming fourth quarter results of 2022 (4Q22) will likely vary due to the changes in tax structure by Indonesia in mid-November 2022.
According to RHB Research, 4Q22 is likely to bring mostly in-line earnings for most players, based on its estimates of production output alone.
“Two may outperform forecasts based on fresh fruit bunch (FFB) output, namely, Kuala Lumpur Kepong Bhd (KLK) and FGV Holdings Bhd, while one such as IOI Corp Bhd could post disappointing numbers due to weak FFB.
“Nevertheless, as it is only the first half of financial year 2023 (1H23) for IOI, there could be a turnaround in output trends in the later quarters,” the research house said in its latest report.
On a quarter-on-quarter (q-o-q) basis, RHB Research has projected 4Q22 earnings for Malaysian plantation companies to drop with Indonesian planters’ performance to be flattish.
“In Malaysia, the FFB output for the companies under our coverage fell by an average of 0.5% q-o-q in 4Q22, while spot crude palm oil (CPO) prices decreased by 1% q-o-q that would translate to slightly lower q-o-q earnings,” explained the research house.
As for Indonesia, RHB Research said, “We estimate 4Q22 FFB output also fell by about 14% q-o-q based on the trend in 3Q22.
“However, CPO prices net of taxes rose 11.6% q-o-q due to the impact of the levy-free period until mid-November 2022, which could translate to flattish q-o-q earnings.”
On a year-on-year (y-o-y) basis, the research house noted Malaysian planters may post weaker earnings, while Indonesian planters are set to post stronger earnings in 4Q22.
“For the Malaysian planters, although average FFB output rose 5% y-o-y in 4Q22, spot CPO prices dropped 24% y-o-y.
“In Indonesia, we estimate FFB output rose about 11.6% y-o-y in 4Q22, while net CPO prices were relatively flat y-o-y (-1.6%) due to the change in tax structure,” added RHB Research.
Another important point is that the CPO price has a greater effect on planters’ earnings than output growth.
Therefore, each plantation company’s forward selling policies would also affect its earnings outlook, said the research house.
“As such, planters such as KLK, IOI, Sime Darby Plantation Bhd
and FGV that undertook more aggressive forward selling activities should be able to recognise better CPO prices than their peers in 4Q22,” noted RHB Research.
For 2022, the spot CPO prices averaged RM5,136 per tonne, up 16% y-o-y. “For 1Q23, given the 26% y-o-y decline in spot CPO prices so far, planters may likely see another y-o-y drop in quarterly earnings,” it added.
For planters with downstream operations in Indonesia, RHB Research also expects margins to improve q-o-q in 4Q22, as the tax levy holiday had ended in mid-November 2022.
RHB Research, which maintained a “neutral” call on the plantation sector, continues to like integrated players such as KLK, IOI and Wilmar International Ltd.
