17.03.2020 (The Malaysian Reserve) - MOST of the accounting fair value (FV) losses experienced by the plantation industry in the fourth quarter of 2019 (4Q19) “will likely reverse and be recognised as accounting profits” this year.
The industry saw weaker results during the quarter due to lower than expected crude palm oil (CPO) average selling prices (ASP) achieved, low output and accounting FV loss on derivative financial instruments (FI) totalling RM337 million, Maybank Investment Bank Bhd wrote in a recent note.
“We believe that most of these accounting FV losses will likely reverse and be recognised as accounting profits in 2020.
“There were also surprise one-off impairments. Positively, the industry recorded its first year-on-year (YoY) profit growth in 4Q19 after seven quarters of decline,” it said.
Core profit after tax and minority interests for the industry in 4Q19 largely missed the research house’s estimates, with core earnings of 80% of the stocks under its coverage falling short of their expectations.
“There were also impairments of assets of RM309 million by TH Plantations Bhd (RM133 million) and Boustead Plantations Bhd (RM176 million) during the quarter.
“For those that recorded low CPO ASP achieved, this was due to earlier locked-in sales commitment. Meanwhile, for some integrated players, there is a one month lag effect in terms of sales recognition considering the logistics involving mills, refineries and end-customers,” the research firm said.
The industry’s YoY profit growth after seven quarters of decline saw purer upstream planters such as TH Plantations, Boustead Plantations and TSH Resources Bhd posting stronger YoY performances, while integrated players such as Kuala Lumpur Kepong Bhd and IOI Corp Bhd registered weaker results.
The weaker results were mainly because of accounting standards which require sales locked in at prices below that of quarter-end to be recognised as FV loss on derivative FI.
“Given 2019’s CPO price only peaked at end-December, companies with forward sales (except those physically delivered) were required to recognise these accounting losses in 4Q19.
“In our analysis, we did not adjust these losses in our core results estimates. Collectively, the industry suffered a combined FV loss of RM337 million. Positively, some of these accounting losses will likely be recognised as accounting profits in 2020 if CPO price stays below end-December 2019 prices,” it said.
For the year-to-date, CPO spot price has averaged at RM2,774 per metric tonne (MT). If prices remain at RM2,350 in March, it will likely average RM2,675 for the 1Q20.
The better prices will likely offset the decline in 1Q20 output, resulting in higher YoY earnings.
“If CPO price stays below RM2,700 per MT by end March 2020, we believe there will be some reversal of earlier FV loss in 1Q20. We maintain our 2020 to 2021 CPO ASP forecasts of RM2,300 to RM2,400,” the research house said.
Meanwhile, Affin Hwang Investment Bank Bhd downgraded the plantation sector from ‘Overweight’ to ‘Neutral’ amid challenges such as the impact of the novel coronavirus.
“In view of our earnings revisions, downgrades of target prices and increased volatility that we are anticipating for the market, we review our sector positioning and largely move away from cyclicals.
“We downgrade plantations from ‘Overweight’ to ‘Neutral’; financials, ‘Neutral’ to ‘Underweight’; oil and gas, ‘Neutral’ to ‘Underweight’; express mail service, ‘Overweight’ to ‘Neutral’; transport and logistics, ‘Neutral’ to ‘Underweight’; utilities, ‘Neutral’ to ‘Underweight’; and gaming, ‘Neutral’ to ‘Underweight’,” it said in a note yesterday.