Friday, August 14

Analysts neutral on plantation sector, solid earnings expected from planters

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KUCHING: Analysts are generally neutral on Malaysia’s plantation sector but  also believe that planters could record solid earnings in the upcoming results season.

Kenanga Investment Bank Bhd’s research arm (Kenanga Research) said despite a weakening price outlook, it maintained a neutral view on the sector as it expects solid earnings from planters to be announced over the next few weeks.

“Year-on-year (y-o-y), we expect the second quarter of 2017 (2Q17) to deliver stronger earnings on the back of both higher crude palm oil (CPO) prices and stronger Malaysian production, while quarter-on-quarter (q-o-q) earnings should be flat-to-higher on seasonally better production albeit softer CPO prices.

“Overall, we expect 2Q17 results to come in largely within expectations as we have priced in production recovery for the year,” it said.

Kenanga Research forecast the plantation sector’s August 2017 supply could hit two million MT, exceeding demand of 1.83 million MT.

It explained, “We expect a production uptrend to continue at a seven epr cent increase to 1.96 million MT with strong recovery in Peninsular Malaysia and growth in Sarawak but milder gains in Sabah.”

It also expected demand to see an improvement of 15 per cent in late August, to 1.61 million MT, on better availability, early festive buying and more attractive discount to soybean oil (SBO).

“In sum, we expect stocks to close 10 per cent higher at 1.96 million MT in August 2017,” the research team added.

On the other hand, MIDF Amanah Investment Bank Bhd (MIDF Research) kept a neutral view on the plantation sector but pointed out that the strong production in the second half of 2017 (2H17) could cap crude palm oil (CPO) price upside.

It explained that the plantation sector’s July inventory came in higher than expected with Malaysia’s palm oil inventory level reaching 1.78 million MT as of end-July 2017.

“CPO production surged by 21 per cent month-on-month (m-o-m) and 15 per cent y-o-y to 1.83 million MT. Peninsular Malaysia palm production leads the recovery by increasing 30 per cent m-o-m to 986,796 MT and this is followed by Sarawak  and Sabah.

“The quantum of July production surge is higher than expected but it could be partly caused by the low base of production in June,” MIDF Research said, noting that June was the festival period as harvesters took leave to go back to Indonesia for Hari Raya.

As a result, production increased significantly in July as harvesting activity resumed.

“The data is short term negative to CPO price but watch out for US dry weather condition. Overall, we are slightly negative on the latest MPOB stats as strong production is expected to cap CPO price upside.

“Having said that, we believe that the market should monitor the dry weather condition in the US as it could drive soybean oil price higher – and hence CPO as well,” it opined.

Overall, MIDF Research expect the plantation sector’s August 2017 inventory to increase 18 per cent m-o-m to 2.1 million MT.

It explained that this was on the back of a production increase of four per cent m-o-m and export increase of two per cent m-o-m.

“We believe that palm oil demand should be supported by good export growth to China as the pre-stocking activity should continue in August.

“Although cargo surveyors data shows decline of 1 per cent in export for the first ten days of July, we believe that export should improve in the remaining of the months due to better demand seen from China,” it added.