Malaysia’s plantation sector might see a weak 4Q, continuing its disappointing streak and ending the year on a low note, analysts observed. — Reuters photo
KUCHING: Malaysia’s plantation sector might see a weak fourth quarter (4Q), continuing its disappointing streak and ending the year on a low note, analysts observed.
“Average crude palm oil (CPO) price has declined by 5.6 per cent from RM2,322 per tonne in 3Q2018 to RM2,191 per tonne so far in 4Q18.
“We believe that this would not be offset by higher fresh fruit bunches (FFB) production and lower production costs in 3Q18.
“Peak palm production in Malaysia and Indonesia is expected to take place in either November or December 2018 while production costs are envisaged to taper off in 4Q18.
“Most plantation companies would have already completed their fertiliser application by 3Q18 before the monsoon season starts in 4Q18,” the research team at AmInvestment Bank Bhd (AmInvestment) said in a recent report.
It pointed out that every quarter this year has been disappointing for the plantation sector as since early this year, plantation companies have been registering poor earnings as the negative impact of the plunge in CPO price was sharper than expected.
“In addition, CPO prices fell throughout the year instead of recovering,” it added.
“For the period of 3QFY18, most of the plantation companies recorded earnings which were below consensus estimates and our expectations.
The sole exception was TSH Resources, which benefited from higher cocoa earnings and CPO output in Indonesia in 3QFY18,” the research team noted.
Although some plantation companies recorded robust FFB production this year, AmInvestment pointed out that this was not enough to offset the plunge in CPO prices.
“Since the start of the year, CPO prices have contracted by almost 30 per cent.
“We estimate that upstream earnings before interest and tax (EBIT) or net profit of the plantation companies fell by 20 to 55 per cent year-on-year (y-o-y) in the first nine months of FY18 (9MFY18) or 1QFYE6/19 due to the fall in CPO prices,” the research team projected.
Meanwhile, it noted that FFB production of planters were higher in 3Q18 compared with 2Q18.
“Companies with oil palm estates in Indonesia and Peninsular Malaysia recorded positive FFB production growth q-o-q in 3Q2018,” it added.
All in, AmInvestment pegged an ‘underweight’ rating on the sector.
It explained: “Going forward, we believe that plantation companies would be suffering from unexciting CPO prices and rising production costs.
Apart from higher minimum wage, the cost of fertiliser is expected to increase by more than 10 per cent in 2019 forecast.”