Recovery forecast for 2024

HLIB Research said most planters expect CPO production cost to trend down further in 2024.

PETALING JAYA: Analysts are generally mixed on the plantation companies’ earnings results for the third quarter of 2023 (3Q23).

Hong Leong Investment Bank (HLIB) Research said, “Out of the seven planters under our coverage, three came in with weaker-than-expected performance, namely, FGV Holdings Bhd, Hap Seng Plantations Bhd (HSP) and IOI Corp Bhd.”

The key disappointment came mainly from lower-than-expected fresh fruit bunches (FFB) production for FGV and HSP and weaker-than-expected manufacturing performance for IOI Corp, the research house said in its latest report yesterday.

According to HLIB Research, all players registered quarter-on-quarter (q-o-q) improvement in their earnings, driven mainly by seasonally higher cropping patterns.

“Earnings performance at the downstream segment improved broadly on the back of improved refining margin, but partly weighed down by persistently weak performance at the oleochemical sub-segment,” the research house noted.

Meanwhile, four out of seven planters under HLIB Research’s coverage, namely, FGV, HSP, IOI Corp and Kuala Lumpur Kepong Bhd saw a year-on-year (y-o-y) decline in their 3Q23 performance.

This is mainly due to weaker upstream earnings arising from sharply lower realised palm product prices and higher crude palm oil (CPO) production cost and weaker downstream earnings arising mainly from weaker margins at refining and oleochemical subsegments, said the research house.

It also said, “Most planters saw y-o-y FFB output increase in 3Q23 (with the exception of FGV and TSH Resources Bhd), on the back of improved FFB yields as the workforce in Malaysia operations started normalising.”

Moving forward, most planters shared that monthly FFB production should likely have peaked in October 2023, and the current El Nino phenomenon will likely have minimal impact on FFB output in 2024.

HLIB Research said most planters expect CPO production cost to trend down further in 2024, on the back of higher productivity and lower fertiliser prices.

The research house, which is “neutral” on the sector, has maintained the CPO price assumptions of RM3,850 in 2023 and RM4,000 per tonne in 2024, respectively.

Year-to-date, the CPO price has averaged at RM3,845 per tonne. For exposure, its top “buy” picks are IOI Corp with a target price (TP) of RM4.66 and HSP with a TP of RM2.06.

Meanwhile, CGS-CIMB Research said the plantation sector is lacking a clear price catalyst. “We forecast average CPO prices of RM3,800 for 2023 and RM3,700 per tonne for 2024,” the brokerage firm said.

With CPO prices already at the top-end of its historical range (excluding 2020-2022), CGS-CIMB Research said it does not expect CPO to trade sustainably above RM4,000 per tonne

Hence, the brokerage firm has reiterated its “underweight” rating on the sector with top “buys” namely Genting Plantations Bhd and Ta Ann Holdings Bhd.

CGS-CIMB Research anticipated CPO production to reach 18.6 million tonnes (up 1% y-o-y) in 2023 and 19.2 million tonnes (firm 3% y-o-y) in 2024, respectively.

CGS-CIMB Research also expects potential earnings rebound amid improvement in production cost. “We forecast a recovery of 29% and 10% in 2024 and 2025, driven by lower production costs following a decline in global fertiliser prices (50% to 60% of production costs),” it noted.

The key upside risks include a hike in CPO prices and positive surprises in dividend payouts.

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