High production costs likely to affect United Malacca earnings

Kenanga Research expects range-bound CPO prices for FY24 and FY25.

PETALING JAYA: United Malacca Bhd’s latest results for the first quarter of financial year 2024 (1Q24) are below expectations, say analysts.

The plantation group’s net profit fell 89% to RM2.68mil in 1Q24 from RM24.3mil a year earlier, dragged down by higher production costs and softer crude palm oil (CPO) prices.

Given the weak start to its financial year 2024 (FY24), Kenanga Research has cut the group’s forecast net profit by 15% to 18% for FY24 and FY25 to reflect the higher production costs in 1Q23.

“Its production costs should ease moving ahead as fertiliser prices have fallen by about 30% year-on-year (y-o-y) and a seasonally higher harvest is due in 2Q24,” the research firm said in a note to clients.

Nonetheless, Kenanga Research has maintained its forecast of net dividend per share of 12 sen annually for the planter.

“We also maintain our asset-based target price (TP) of RM5 a share with a ‘market perform’ call,” it added.

The risks to its call include adverse weather, softer CPO prices as well as rising cost of labour, fertiliser and fuel.

Kenanga Research expects range-bound CPO prices for FY24 and FY25.

“A fragile supply-demand outlook for edible oil for 2023 and 2024 suggests a volatile trading environment ahead with little room to absorb negative news.

“This may be poorer-than-expected weather such as a severe El Nino or an unexpected disruptions in the supply chain such as lower river levels making exports difficult or surging freight charges,” it noted.

Hence, the research firm has raised its average CPO price back to RM3,800 per tonne from RM3,700 for FY24 and FY25 on the back of higher risk premium for palm oil.This is in light of the impending El Nino, which is now almost certain and just a matter of severity.

Specifically, should the current expectation of a “strong” El Nino turn to “very strong,” higher CPO prices cannot be dismissed, it added.

Meanwhile, TA Research also revised downward its FY24 and FY25 earnings projections for United Malacca by 40.7% and 6.8%, respectively, after imputing lower margins and rising interest costs.

It said United Malacca’s management expects the group’s fresh fruit bunch production to be higher in FY24, supported by better oil palm age profile and crop recovery in its Indonesian operations.

TA Research, which maintained a “sell” call on United Malacca, has adjusted lower the stock’s TP to RM4.01 a share from RM4.78 previously.

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