KUALA LUMPUR: Maybank IB Research expects the plantation sector to see continued earnings pressure in the first quarter of 2019 (1Q 2019), mainly on weak spot crude palm oil (CPO) average selling price (ASP).
In a note yesterday, it said integrated players would however still fare relatively better, benefiting from low raw material costs.
The research house said the 10 per cent year-on-year (y-o-y) output growth to 4.95 million tonnes recorded in 1Q19 was insufficient to offset the 19 per cent declined in spot CPO ASP to RM2,007 per tonne.
“CPO’s by product, palm kernel, suffered an even bigger decline in price, which averaged at RM1,296 per tonne,” it said.
“Overall, we expect the Malaysian-based upstream players to record lower y-o-y 1Q 2019 core earnings by at least five to 20 per cent, with larger y-o-y decline in their bottom lines,” it added.
Meanwhile, downstream players may see improved y-o-y earnings in the quarter, with IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK) likely to record decent margins in 1Q 2019, benefiting from cheap raw material costs.
“Indonesia’s temporary suspension of export levies on palm products since December 2018 has created a more level playing field for Malaysian downstream producers in 1Q 2019.
“We witnessed higher utilisation rates for Malaysian refining capacity in 1Q 2019 at 70 per cent as compared to 59 per cent in 1Q18,” it added.
The research house also expected companies such as TH Plantations Bhd and Boustead Plantations Bhd to post quarterly losses following their relatively higher cost of production.
At 3 pm, shares in TH Plantations were unchanged at 50 sen while Boustead Plantations’ shares fell half-a-sen to 78.5 sen.
Maybank IB Research estimated the industry’s average all-in operating cost of production in Malaysia to be RM1,830 per tonne in financial year 2018 (up 12 per cent y-o-y).
“Positively, companies with relatively higher US dollar debt exposure (mainly IOI Corp), are likely to benefit marginally from unrealised foreign exchange translation gains as the ringgit strengthened against the US dollar quarter-to-quarter,” it added.
IOI Corp added two sen to RM4.26 and KLK dropped 10 sen to RM24.40 at press time.
Overall, the research house recommended investors to look beyond seasonally weak 1Q 2019 as valuations of small-mid caps such as Ta Ann Holdings Bhd and Sarawak Oil Palms Bhd are low on an enterprise value/planted hectare basis and present accumulation opportunity.
“Maintain ‘neutral’ on the sector. We have a ‘buy’ on Ta Ann and Sarawak Oil Palms,” it added. — Bernama