KUCHING: Analysts expect the plantations sector to record strong results in the fourth quarter of 2018 (4Q18) on the back of stronger output in the second half of 2018 (2H18).
According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research), between 3Q and 4Q18, earnings will likely peak in 4Q18 on high output, higher crude palm oil (CPO) price and lower cost as fertilising work would be minimal in 4Q18.
“We anticipate CPO price to make its seasonal price recovery in 4Q18 (as market price forward weaker supply in 1Q19). Hence, we maintain our 2018 CPO average selling price (ASP) forecasts of RM2,450 per tonne for now but recognising that earnings risk is on the downside if spot CPO price do not recover strongly from here,” the research team said.
It also pointed out that the plantations sector’s 3Q18 earnings would not likely look as promising relative to 4Q18 given the still weak spot CPO and palm kernel (PK) ASPs.
“In addition to existing ample palm oil supply amidst seasonally high output months in 2H18, the escalating trade tension between US-China, expectation of a good soybean harvest in the US, and relatively weak demand from India (due to its high import taxes, and weak rupee) have all contributed to a lackluster near term CPO price outlook.
“The only positive right now has been the high crude oil price which has boosted discretionary demand for palm biodiesel. Indonesia holds the key in supporting CPO price as the government has pledged to boost the usage of palm biodiesel in 2H18 after the domestic blend use disappointed at only circa one million metric tonne in 1H18. As long as fossil fuel price remains high, it will provide a good floor price support for CPO price,” Maybank IB Research added.
Meanwhile, on the impact of 2019’s minimum wage hike on the plantations sector, the research team believe that the hike is manageable for both Peninsular and East Malaysian planters.
It explained, “By our estimate, every RM50 per month increase (for Peninsular) and RM130 per month increase (for East Malaysia) in minimum wage will reduce bottom lines for companies under our coverage by up to 0.6 to 6.6 per cent (using FY19E earnings as reference).
“This assumes companies will raise the wages of harvesters and general workers by the same quantum within the same region (which may not necessarily be the case for harvesters whose take home pay are usually above minimum wage).”
It noted that bigger losers to this minimum wage hike were likely companies which operate solely in Malaysia (in particular those with higher exposure in East Malaysia like Sarawak Oil Palm and Ta Ann) and those with relatively higher cost of production (such as Boustead Plantations and TH Plantations).
However, on the positive side, Maybank IB Research said that at least there is now clarity on the minimum wage which has been an overhang issue for the sector.
“And this minimum wage hike will be overall manageable as companies will continue to seek to further mechanise operations where possible to reduce labour costs,” it added. All in, Maybank IB Research pegged a ‘neutral’ rating on the sector.