PETALING JAYA: Analysts are expecting plantation players to report stronger upstream earnings for the fourth quarter of 2024 (4Q24), supported by higher crude palm oil (CPO) prices which helped offset the impact of lower production.
Commenting on the ongoing results season, in particular on how plantation companies could have performed for 2024, BIMB Securities Research opined that the resultant higher prices stemming a decline in CPO stock would benefit pure upstream players such as Hap Seng Plantations Holdings Bhd and Sarawak Plantation Bhd
. This was underpinned by stable fertiliser costs and company cost-efficiency efforts.
The research house added that integrated plantation companies are likely to face challenges in their downstream segments, particularly in the refining sub-segment, where margin compression may occur due to heightened competition from Indonesia and higher palm product prices.
“Among stocks under our coverage, we expect Hap Seng Plantations to register stronger earnings, driven by higher realised average selling price and higher fresh fruit bunch (FFB) output, as well as potential higher CPO sales volume,” said BIMB Securities Research.
RHB Research noted that Malaysian downstream companies might experience weaker quarter-on-quarter (q-o-q) margins due to the increase in competition from their Indonesian counterparts.
A plantation analyst with a foreign research house picked a Singaporean upstream player as its top choice for the region, citing good cost discipline and an attractive dividend yield as influencing factors.
While keeping an overall “neutral” call on the sector, the rating changes to individual companies under his coverage will be reflected in the upcoming earnings release, pending latest guidance on output growth and cost of production, including the recent 2% mandatory Employees Provident Fund contribution set by the government for foreign workers.
Companies under the analyst’s coverage include Boustead Plantations Bhd, Genting Plantations Bhd, IOI Corp Bhd and Johor Plantations Group Bhd.
Notably, he conceded that the outlook for palm oil continued to be clouded by availability of cheaper alternatives.
“Besides the decline in the Indian import of palm oil, another stumbling block is the acceleration of B40 biodiesel blending programme in Indonesia, which already missed the original timeline amid depleting CPO funds to subsidise the biodiesel production,” he said.
It is telling that BIMB Securities Research is among a host of brokerage firms that are sitting on the fence as they consider the outlook for the plantation industry, albeit with a couple of research houses being mildly optimistic, as seasonally low CPO production in January had led to decreased exports.
According to TA Research, CPO production last month fell 11.8% year-on-year (y-o-y) to 1.24 million tonnes, with all states recording declines, as Peninsular Malaysia saw the largest drop at 13.1% y-o-y, followed by Sabah and Sarawak, which saw a 12.9% and 7.7% decline, respectively.
The research house is anticipating lower CPO production to continue in the first quarter of the year (1Q25), followed by a gradual recovery toward the second half of 2025 (2H25).
“Three-month futures for CPO have risen by 2.8% over the past month, driven by declining stockpiles, adverse weather conditions and Ramadan restocking demand – all of which have supported the price increase,” it said.
TA Research is expecting demand from India to slow due to negative refining margins, as Indian refiners are anticipated to opt for cheaper soybean oil over palm oil, which would suppress the upside potential of palm oil prices.
“India’s palm oil imports fell to a 14-year low in January due to the relatively high prices and weak refining margins.
“Meanwhile, the soybean oil spread over palm oil has turned negative again, potentially encouraging buyers to shift to soybean oil,” it said in a note to clients yesterday.
Looking ahead, the research house said it would be closely monitoring a number of key factors including palm oil supply from Malaysia and Indonesia, weather-related harvest delays in Brazil, shifting global trade dynamics and China’s stricter customs inspections on Brazilian soybeans, which may impact supply chains and market trends.
Chief investment officer of Tradeview Capital Nixon Wong expected sectoral 4Q24 results to likely be positive on the back of the elevated CPO prices.
He projected that CPO supply would continue to be tight in the near term, before entering harvesting season in 3Q25, which could support prices, echoing the forecast by industry analysts that CPO prices would be hovering at between RM4,200 and RM4,500 per tonne this year.
RHB Research, AmInvestment Bank Research (AmBank Research) and CIMB Securities are keeping “overweight” calls on the plantation sector, influenced by factors ranging from positive corporate fundamentals, and the projected recovery in palm oil demand.
This was due to the significant narrowing in CPO price premium to US soybean oil in January.
The factors were bolstered by the restrictions on the use of imported used cooking oil as biodiesel feedstock in the United States that may increase the country’s reliance on vegetable oil imports.
RHB Research said FFB output of Malaysian planters under its coverage dipped by an average of 2.5% q-o-q, while spot prices surged by 26.3% q-o-q to RM4,840 per tonne in 4Q24, which should imply higher segmental earnings for the quarter in review.
CIMB Securities, in a note yesterday, projected planters to report better earnings in 4Q24, supported by higher CPO prices and increased production from Indonesia.
IOI Corp, Johor Plantations and Hap Seng Plantations are among the common top picks for a variety of research houses.
BIMB Securities Research, Hong Leong Investment Bank (HLIB) Research and CIMB Securities have respective target prices (TP) of RM4.50, RM4.30 and RM4.38 for IOI Corp, while also projecting respective TPs of RM2.40, RM2.44 and RM2.45 for Hap Seng Plantations.
Research houses are seeing tight CPO supply at least for the remainder of 1Q25, with a seasonal pick-up in inventory from April.
