KUCHING: Most plantation companies are slowing down their capital expenditure for palm oil mills on the back of falling crude palm oil (CPO) prices and economic uncertainties over Covid-19, analysts note, following a meeting with CB Industrial Product Holding Bhd (CB Industrial) recently.
“Due to the fall in CPO prices and economic uncertainties over Covid-19, most planters are delaying their spending on palm oil mills until absolutely necessary,” AmInvestment Bank Bhd (AmInvestment Bank) said in its company report on CB Industrial.
“Generally, a palm oil mill is required when mature areas reach between 7,000 hectares (ha) and 10,000ha.”
That said, the research firm noted that CB Industrial is envisaged to secure RM200 million new mill contracts in financial year 2020 forecast (FY20F) versus RM334 million in FY19.
“Almost all of the new contracts in FY20F are expected to come from Indonesia. Unbilled sales of the mill manufacturing division were RM429 million as at end-FY19.
“This is enough to sustain the group’s profitability for about a year and a half.”
According to AmInvestment Bank, pre-tax profit margin of the mill manufacturing division is expected to be 19 per cent in FY20F versus 19.9 per cent in FY19.
The research firm highlighted that low steel costs are envisaged to support CBIP’s profit before tax (PBT) profit margin in FY20F, steel is estimated to account for 36 per cent of the group’s production cost while pumps and gear boxes make up another 24 per cent.
“We understand that the selling price of a 45 tonnes per hour palm oil mill has been flat in the past one to two years.”
Looking ahead, AmInvestment Bank believed that CB Industrial’s plantation division in Central Kalimantan would remain in the red in FY20F.
“This is due to high production costs and low CPO prices and production.
“We estimate mature areas to be 4,000ha to 5,000ha in Indonesia. Planted areas are about 13,441ha.
“The plantation division recorded a pre-tax loss of RM18.5 million (excluding impairment of RM10 million) in FY19.”
The research firm also noted that CB Industrial’s palm refinery in Johor commenced operations in January 2020 but earnings contribution from the palm refinery is not expected to be significant.
It recapped that the group has a palm refinery with a capacity of 250,000 tonnes per year in Klang and a palm refinery with a capacity of 134,000 tonnes per year in Johor.
“CB Industrial also has two biodiesel plants in Klang with a total processing capacity of 350,000 tonnes per year and a biodiesel plant in Johor with a processing capacity of 120,000 tonnes per year.
“We believe that global discretionary demand for biodiesel would be weak going forward due to low crude oil prices.”