Still lack of growth catalysts despite share price at multi-year low

TheEdge Mon, Mar 25, 2019 10:28am - 5 years View Original


KUALA LUMPUR: Last year, plantation companies were the big losers by share price performance on Bursa Malaysia.

The reason was that planters had a bad year in 2018. Their earnings dropped sharper than expected, no thanks to lower sales and lower average selling prices of fresh fruit bunches (FFB), crude palm oil (CPO) and palm kernel.

For Genting Plantations Bhd, its annual net profit halved to RM164.90 million for the financial year ended Dec 31, 2018 (FY18), against RM335.09 million the year before, dragged by weaker selling prices. Its improved revenue on higher offtake of biodiesel and refinery products from its downstream manufacturing segment together with progressive completion of works at its property segment, however, was not strong enough to stem the fall on profit.

Likewise, Sarawak Oil Palms Bhd’s net profit plunged 74% from RM232.92 million to RM61.30 million in 2018, its lowest net profit  in 12 years for quite similar reasons as Genting Plantations. Just few plantation stocks, such as United Plantations Bhd and Genting Plantations, eked out marginal gains on share price. Most of the rest had fallen more than 25% in the course of a year, Bloomberg data showed.

Fundsupermart Research analyst Jerry Lee Chee Yeong foresees limited growth moving forward, although most of the industry’s negative factors have been priced in. “At this moment, we do not see any strong catalysts that could drive earnings for the plantation sector, especially for the CPO players. The sector is uninteresting in our view and would be rather flattish this year,” Lee told The Edge Financial Daily.

Nonetheless, CIMB regional head of agribusiness Ivy Ng sees CPO production, which improved 12% year-on-year (y-o-y) in the first two months of 2019, bodes well for plantation earnings. But this is likely to be more than offset by the 17% y-o-y decline in CPO prices and rising costs due to higher minimum wages, she added.

Ng sees average CPO prices at RM2,400 a tonne this year.

AllianceDBS Research, however, is more positive. It expects CPO prices to be at RM2,560 in FY19, RM2,560 in FY20 and RM2,590 in FY21, helped by an incremental two million tonnes in palm oil demand as a result of Indonesia’s B20 mandate.

This will be supported by a pickup in demand due to the dissipating effects of bumper crops from Indonesia last year. The restocking activities from India and China, as well as slower output growth as FFB yields are also not expected to fully normalise to its 2015 level will lend support to edible oil prices.

“Malaysian plantation players mostly have upstream exposure, which is why we believe the profitability of most plantation players are expected to improve significantly year-on-year on the back of an increase in CPO prices due to high operating leverage.

“Having said this, crude palm kernel oil and coconut oil prices have been depressed thus far and if CPO prices remain depressed, the lower feedstock cost for oleochemicals is expected to cushion some of the fall in upstream earnings,” the research firm said.

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