KUCHING: Despite the plantation sector experiencing a weak first quarter of 2016 (1Q16), Affin Hwang Investment Bank Bhd (Affin Hwang) believes that better quarters are ahead for the sector.
In 1Q16, all plantation companies under Affin Hwang’s coverage posted lower profits (a pretax loss in the case of Felda Global Ventures Holdings Bhd (FGV)) year on year (y-o-y) and quarter on quarter (q-o-q).
According to Affin Hwang, fresh fruit bunch (FFB) production was sharply lower due to the negative impact of the strong El Nino event that started in June/July 2015, thereby leading to lower sales volumes and a higher crude palm oil (CPO) cost of production.
“On average, plantation earnings for the companies declined by 71.2 per cent q-o-q and 35.8 per cent y-o-y,” it said.
The research firm noted that for IOI Corporation Bhd (IOI) and Sime Darby Bhd (Sime Darby), it has used operating profit due to unavailability of data while the rest are pre-tax profit in aggregating plantation profit performance.
Affin Hwang highlighted that for the four companies with significant downstream manufacturing operations, IOI, Kuala Lumpur Kepong Bhd (KLK) and Sime Darby performed better y-o-y in 1Q16 mainly due to higher contirbutions from their oleochemical sub-segments.
“FGV turned around from a loss of RM21.7 million in 1Q15 to a profit of RM1.8 million mainly due to higher US fatty-acid sales and higher margins from kernel crushing.
“Sequentially, lower profits were recorded by FGV (due to unrealised forex loss), KLK (narrower margins in Malaysia and lower profit from oleochemcials) and Sime Darby (lower profit from Thailand and share of loss by Emery group).
“Overall, manufacturing profit increased by 54.8 per cent y-o-y but declined by 13.1 per cent q-o-q,” it said.
FFB production for Affin Hwang’s universe of plantation companies declined by an average of 29.1 per cent q-o-q and 7.4 per cent y-o-y in 1Q16. The research firm estimated the lower FFB production to have added RM100-200 per metric tonne (MT) to unit CPO cost of production in the quarter.
The usual seasonal declines in the first three months of the calendar year had been accentuated by the strong El Nino event, it said.
“Production declines were sharper for companies with large areas in Sabah and Kalimantan, which had significantly less rainfall than normal,” it said.
1Q16 CPO average selling prices (ASPs) for the plantation companies under Affin Hwang’s coverage increased by an average of 7.1 per cent q-o-q and 2.7 per cent y-o-y as prices recovered from the second half of 2015 (2H15) lows (RM1,867 per MT in August 2015).
The research firm noted that blended CPO ASPs were lower for companies with significant operations in Indonesia due to the export levy of US$50 per MT on CPO (and US$30 per MT on processed palm-oil products), which widened the Indonesian discount to around RM290 in 1Q16.
“A CPO export tax of US$3 per MT with effect from last month will likely add to the discount,” it said.
Yields are expected to improve in the coming quarters as El Nino subsides, while Affin Hwang’s CPO ASP assumption is unchanged at RM2,400 per MT.
While sentiment has generally improved, AffinHwang Capital said plantation stock prices have weakened again after the spurts in March and April. As such, the firm maintained its sector ‘neutral’ rating and stock recommendations.