KUCHING: Rising stockpiles, a dip in exports and dropping palm oil prices has left analysts at iFAST Research to downgrade its earnings revisions for local plantation stocks as it believes the sector is currently overvalued.
Palm oil prices, represented by the benchmark Crude Palm Oil (CPO) futures, have been on a downward spiral since peaking at RM2,912 per metric tonne (MT) on March 11, it said.
On Sept 2, 2014, CPO price hit a 5.5 year low of RM1,914 per MT, representing a 34 per cent drop since the March high.
“The dramatic decline can be attributable to rising stockpiles,” it explained.
“Malaysian Palm Oil Board reported that inventory levels in August hit 2.05 million metric tonnes, the highest level since March 2013.
“Indonesia, the world’s biggest palm oil producer, also recorded palm oil reserves at a 15-month high in August.
“High inventories could lead to oversupply for the next few months and possibly further dampen CPO prices.”
Moreover, palm oil exports have been deteriorating in the past year, iFAST Research added.
Malaysian palm oil exports have seen negative contraction on a year-on-year basis in 10 out of the last 12 months, indicating that external demand has been slowing which coincides with the increased inventories.
The slowdown in demand can also be attributed to the increased supply of soybean oil, which serves as a substitute for palm oil, since end-Dec 2013, with the recent release of Crop Production Report by the United States Department of Agriculture (USDA).
The statistics estimate that soybean production for the US (which accounted for 34.5 per cent of global soybean production as of end-December 2013) is on track to achieve a record level of 14.4 billion bushels in 2014 as compared to a production level of 13.9 billion bushels in preceding year.
The ample global supply of soybean oil, as well as the declining trend of its price, might continue to put downward pressure on the price and demand for CPO.
“In response to the declining CPO prices, high stockpile levels and slowing demand, analysts have downgraded earnings estimates for plantation companies,” it highlighted.
“Moreover, the negative impact on plantation companies is also due to the issue surrounding the potential revision of plantation regulations by Indonesia’s Ministry of Agriculture (MOA), which might lead to a possible 30 per cenr cap on foreign ownership of plantation land in Indonesia.” The implementation of stricter plantation regulations might potentially restrict the expansions and impact the existing holdings of landbanks by big plantation companies such as IOI Corp Bhd and Felda Global Ventures Holdings, it added.
Consequently, earnings for 2014, 2015 and 2016 have been revised downwards by 15.9 per cent, 15.7 per cent and 10.9 per cent since July respectively.
Plantation stocks, represented by the Bursa Malaysia Plantation Index, dropped as much as 10.5 per cent since the peak in May 2014.
Consequently, the Malaysian government stepped in by temporarily removing the palm export tax for September and October to help cushion the adverse effect of declining prices on plantation companies.
“Despite the downward earnings revisions and huge decline in prices, plantations stocks have only corrected by around minus 10.5 per cent, which means that valuations are now higher for the sector.”