PETALING JAYA: The competition in the palm oil downstream segment may intensify in the second half of the year following the recent restructuring of tax policy in Indonesia, giving Indonesian downstream players an extra edge over their Malaysian counterparts.
In addition, Malaysian companies in the sector also face challenges from India’s import tax hike on refined products, which was increased to 32.5% from 12.5% effective Sept 14.
However Sarawak Oil Palms Bhd
(SOP) remained hopeful for the second half of the year driven by higher utilisation from its refineries (second quarter or 2Q24: 85% versus financial year 2023 or FY23: 70%) and a better product mix.
“Although no disclosure on contributions, SOP guided that the downstream segment improved quarter-on-quarter in 2Q24 to positive levels (1Q24 refining margins: slightly negative), thanks to more favourable pricing mix and higher trading contribution.
“We keep our utilisation rate assumptions at 75% for FY24 to FY26 to be conservative but lower the margin assumptions to 2.5%, 3% and 3% from 3.5%,” RHB Research said.
RHB Research kept its “buy” call with a target price of RM3.60 as it remained upbeat on SOP’s earnings prospects for FY24 to FY26.
It explained that SOP’s prospects will be supported by its solid fresh fruit bunch (FFB) growth and lower production cost, albeit offset by lower margins from the downstream segment.
SOP recorded a year-to-August FFB growth of 8% year-on-year, thanks to its relatively young age profile.
Nevertheless, SOP is maintaining its FY24 FFB growth target at 5% to 6%, as peak production for September and October is coming in slightly lower than expected.
The research house has cut its FY24 earnings forecast by 6% but raised FY25 and FY26 earnings forecast by 1% and 4% after adjusting for FFB production growth, production cost and downstream margins.
