Upstream-centred planters in for strong 1Q profit

PETALING JAYA: Plantation companies with 70% to 100% of revenue from the upstream segment are expected to report robust first-quarter 2024 (1Q24) earnings.

This is based on improved crude palm oil (CPO) production year-on-year (y-o-y), relatively stable average CPO prices and decreasing fertiliser costs.

CGS International (CGSI) Research said these include companies such as Genting Plantations Bhd, Hap Seng Plantations Holdings Bhd, Sarawak Plantation Bhd and Ta Ann Holdings Bhd.

However, it believes a slowdown in the manufacturing/downstream segment could affect the 1Q24 results of IOI Corp Bhd, Kuala Lumpur Kepong Bhd and FGV Holdings Bhd.

However, they could improve quarter-on-quarter (q-o-q) off a low base in 4Q23.

It has a “neutral” call on the agribusiness sector as it sees good support for CPO prices at the RM3,800 per tonne level.

This will be helped by the recovery in production, decreasing fertiliser costs and reasonable valuations at 18 times financial year 2024 (FY24) price/earnings ratio (P/E), especially for the predominantly upstream players.

The research house maintained its 2024 average CPO price of RM3,700 per tonne, as CPO prices could trade slightly lower in the second half of 2024 with the higher purchase order inventory levels.

Its top sector picks are Genting Plantations with an “add” call with a target price (TP) of RM6.62 a share for its strong net profit rebound over financial year 2024 (FY24) to FY26, driven by the plantation segment and stable property outlook.

Its top pick also includes Ta Ann with an “add” call and TP of RM4.53 a share for its attractive valuation at 10 times forecast FY24 P/E in its view, given a strong net cash position, decent return on equity and dividend yield.

The upside risks cited for the sector are a sharp increase in CPO prices to above RM4,000 per tonne, and strong rebound in the downstream segment. The downside risks are lower CPO production, decline in CPO prices and a hike in fertiliser prices.

Meanwhile, total fresh fruit bunch (FFB) production for companies under its coverage dipped by 1% y-o-y from 3.44 million tonnes in 1Q23 to 3.4 million tonnes in 1Q24.

This was due to heavy rain at end-December 2023 continuing into January 2024, which dampened harvesting activities.

Nonetheless, total CPO production for companies under its coverage rose 40% y-o-y to 1.2 million tonnes in 1Q24 due to the higher oil extraction rate, resulting from better quality of harvested FFB, supported by the return of foreign labour to the estates.

Both FFB and CPO production fell by 23% q-o-q in 1Q24 due to seasonal factors, such as fewer working days and reduced labour force during Ramadan in March 2024.

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