Mixed performance from plantation players likely

PETALING JAYA: Plantation companies are expected to deliver a mixed bag for the quarter ended March 31, 2024 in the current results season.

This trend is mainly attributable to a seasonally low production season and subdued downstream earnings for the quarter under review, according to Hong Leong Investment Bank (HLIB) Research.

In its first quarter (1Q24) results preview report, the brokerage noted that planters under its coverage had registered quarter-on-quarter declines of 13.2% to 29.5% in fresh fruit bunch (FFB) output during the quarter.

“Seasonally lower production, albeit partly mitigated by higher palm product prices, likely dragged upstream earnings in 1Q24,” HLIB Research said.

“Earnings performance at downstream segment, on the other hand, likely remained subdued in 1Q24 on the back of weak near-term demand prospects, arising from weak global economic environment,” it added.

Specifically, HLIB Research pointed out that four out of seven planters under its coverage registered lower FFB output on a year-on-year (y-o-y) basis.

These four were FGV Holdings Bhd, Hap Seng Plantations Bhd, IOI Corp Bhd and TSH Resources Bhd.

Conversely, Kuala Lumpur Kepong Bhd and Sime Darby Plantation Bhd were the two that registered respectable FFB output growth of 8.3%-8.5% y-o-y.

“Planters with higher exposure in Indonesia likely fared better than those in Malaysia (particularly those with heavier exposure in Sabah), due to rain in Sabah during January to February,” HLIB Research said.

“Performance at downstream segment likely weakened on a y-o-y basis, due to high-base effect and weak near-term demand prospects,” it added.

Overall, HLIB Research maintained its “neutral” stance on the plantation sector, citing the absence of notable demand catalyst. It maintained its crude palm oil price (CPO) assumptions at RM4,000 per tonne for 2024 and RM3,800 for 2025. Year-to-date, the CPO price averaged at RM4,056 per tonne.

HLIB Research said the CPO price would start tapering off when palm’s seasonal output recovery takes place.

Its top sector picks are IOI and Hap Seng Plantations.

Zooming in on selected planters, HLIB Research noted the 3.5% y-o-y decline in IOI’s FFB output was due mainly to less favourable weather conditions during January to February in Sabah, which accounted for more than 60% of its total palm oil area and ongoing replanting activities.

The brokerage added that IOI’s flattish upstream earnings, as lower FFB output would likely be mitigated by lower CPO production cost, were expected to be negated by weak performance at the downstream segment.

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