PETALING JAYA: There is mixed reaction in the plantation sector as poor downstream margins are expected to continue dragging down earnings of large integrated players for another two quarters.
These include IOI Group Bhd, Kuala Lumpur Kepong Bhd
and Sime Darby Plantation Bhd.
In a report, Kenanga Research said it expects a mixed outlook.
“Specialty or performance-specific oils and fats like cocoa butter equivalent, or customised oleochemicals, for example, should continue to enjoy better margins even if the broader market is soft as volume for specialty products can be small,” it noted.
However, it said the smaller and more upstream-centric players have nudged the Bursa Malaysia Plantation Index (BMPI) up by 3% since the fourth quarter of 2023.
“The current year-to-date 3% increase is very much within the historical range. Underpinning such BMPI intra-year trading patterns is, to a large degree, due to the price movement of edible oil, including palm oil,” Kenanga Research said.
On prices, the research firm said it will maintain its average crude palm oil (CPO) price assumption of RM3,800 per tonne in 2024.
It added that prices were usually firmer in the first quarter and weakest in the third, mainly due to the third-quarter harvests of four major oil crops – palm, soy, grape seed and sunflower, which make up 70% to 80% of the world’s edible oil production.
Kenanga Research said it expects upstream margins to improve this year and in 2025, from firm but flattish CPO prices in an easier operating cost environment, as well as lower production costs as global fertilisers and fuel costs trend down.
“Within the sector, we prefer growth over yields, hence PPB Group Bhd is attractive given its own and associate Wilmar’s agribusiness in South-East Asia, China and India.”
Meanwhile, UOB Kay Hian Research said it will maintain its “overweight” call on the sector as it expects CPO prices to remain steady in the short term.
It also noted that CPO prices may approach a peak and face retracement.
Therefore, investors should trim holdings in companies with smaller earnings growth.
“That said, we still reckon that there are some opportunities for the plantation sector, especially pure upstream players with good production growth like Hap Seng Plantations Bhd,” UOB Kay Hian Research said.
