KUCHING: Malaysia’s plantations sector will likely record lower earnings in the first half of 2018 (1H18) compared with the year before which analysts said was caused by softer crude palm oil (CPO) production and price.
The research arm of AmInvestment Bank Bhd (AmInvestment) noted, “So far, average CPO price (MDEX price) has been RM2,461 per tonne in 1H18, 16.2 per cent weaker than the average price of RM2,938 per tonne (MPOB price) recorded in 1H17.”
It pointed out that any increase in CPO production would not be able to make up for the fall in CPO price.
“Hence, we expect plantation earnings to be unexciting in 1H18 against 1H17,” it added.
On a quarterly basis, for the first quarter of 2018 (1Q18), all plantation results were below consensus estimates.
“Most of the plantation earnings dived by more than 40 per cent y-o-y in 1Q18. The negative impact of the decline in CPO price could not be offset by higher CPO production in 1Q18.
“According to the Malaysian Palm Oil Board (MPOB), average CPO price slid by 21.7 per cent from RM3,152 per tonne in 1Q17 to RM2,467 per tonne in 1Q18.
“In contrast, fresh fruit bunches (FFB) output of the companies under our coverage climbed by negative 4.9 per cent to 32.3 per cent y-o-y in 1Q18,” it noted.
Earnings of most downstream units were also lower, it added.
“The sterling downstream performances of most of the integrated plantation companies in 4Q17 were not sustained in 1Q18. KL Kepong’s oleochemical unit experienced lower selling prices in 1Q18, which resulted in margin erosions.
“IOI Corporation suffered fair value losses on foreign currency forward contracts of RM7.2 million in 1Q18 in contrast to gains of RM66.1 million in 4Q17.
“On the flip side, Sime Darby Plantation sustained its EBIT QoQ in 1Q18 on the back of positive refining margins and strong demand for high-value products,” it explained.
AmInvestment further pointed out that planters were also bogged down by higher CPO production costs in 1Q18.
“We believe that CPO production costs of the plantation companies rose in 1Q18 dragged by higher fertiliser costs and minimum wage in Indonesia.
“In addition, some plantation companies recorded increases in maintenance and upkeep costs in 1Q18 as there were new areas coming into maturity.
“However, due to the surge in CPO production in 1Q18, production cost on a per tonne basis of some of the plantation companies was relatively flat y-o-y in 1Q18,” it added.
Looking ahead, the research team said, the plantation sector’s CPO production in 2H could exceed 1H, as several plantation companies have said that 2H would account for 55 per cent to 56 per cent of the full year’s CPO production while 1H would account for the balance 44 per cent to 45 per cent.
“Hence, CPO production is expected to continue to rise in 2H18. The highest level of CPO output is envisaged to take place in either late 3Q or early 4Q.
“However comparing 2H18 against 2H17, there is a possibility that CPO production may decline as there was a strong recovery in yields in 4Q17,” it added.
Overall, AmInvestment said, “Comparing 2Q18 against 1Q18, we believe that plantation earnings may be lower due to softer CPO production and price. CPO production may be weaker in 2Q18 compared with 1Q18 as estate workers return home for the Hari Raya festivities.
“So far, average CPO price (MDEX price) has been slightly lower at RM2,413 per tonne in 2Q18 compared with RM2,490 per tonne in 1Q18.”