New Straits Times (08/09/2020) KUALA LUMPUR: Crude palm oil (CPO) prices have rallied to nearly RM3,000 per tonne from the year-to-date low of RM2,000 per tonne in May, buoyed by lower inventory and higher soybean oil prices.
This would help Malaysia's listed plantation companies to post stronger performance in the second half of the year (2H20), analysts said.
Affin Hwang Capital said CPO prices had seen some recovery from the year-to-date low in May of RM2,000 per tonne to the current level of RM2,800-2,900 per tonne.
The higher prices are partly attributable to the increase in demand for palm oil products due to stock replenishment, lower palm oil inventory levels as well as an increase in soybean oil prices.
"However, given that the Covid-19 pandemic is still evolving globally and uncertainties remain in the market in the short term, we are cautious on the outlook for the fourth quarter 2020 (Q4 2020).
"We maintain our CPO average selling price (ASP) assumption for 2020-2021 earnings at RM2,350-RM2,450 per tonne," Affin Hwang said today.
The firm cautioned that after the rally in CPO prices to the current level of RM2,800-2,900 per tonne, there could potentially be a pullback in prices amid pressure from rising stock levels towards Q4 2020.
"We expect inventory levels at key producing countries to rise as we believe palm-oil production will outweigh total consumption in 2H20," it added.
Affin Hwang, nevertheless, expects pure upstream plantation companies to report better performances in their 2H20 financial results.
"For 2H20, we expect earnings to improve for upstream plantations driven by higher FFB (fresh fruit bunch) and CPO production and lower production costs, while downstream divisions could remain lacklustre due to uncertainties surrounding the Covid-19 pandemic," it said.
Under Affin Hwang's coverage, IJM Plantations Bhd and Hap Seng Plantations Bhd are the pure upstream players, while IOI Corporation Bhd and KL Kepong Bhd have higher exposure to downstream manufacturing businesses.
CGS-CIMB Research analyst Ivy Ng Lee Fang and Nagulan Ravi said average CPO price had grown 12 per cent month-on-month (M-o-M) and 36 per cent year-on-year (Y-o-Y) to RM2,815 per tonne in August.
This was on concerns over the relatively low inventory level of palm oil in Malaysia and Indonesia, and that output during the expected peak production period of August-December could disappoint due to labour issues in Malaysia and weather issues in Indonesia.
CGS-CIMB has projected CPO prices to trade at RM2,400-RM2,800 per tonne in September.
"Assuming our view of higher palm oil supply in Q4 materialises, we believe further upside to CPO prices could be capped as concerns over current tight inventory will ease and B30 mandate may be difficult to fulfil beyond 2020 due to lack of funding," they said.
They have projected a six per cent M-o-M rise in CPO output in August, which is broadly in line with historical trends of a six per cent M-o-M increase in August output over the past 10 years.
"Our survey revealed that Sabah and Sarawak estates were the main drivers behind the improving FFB yields.
"This is not unexpected as Peninsular Malaysia estates posted sharper-than-expected recovery in yields in the May-July period compared with East Malaysian estates," they wrote in a report.
CGS-CIMB has maintained its "neutral" call on the plantation stock, with Genting Plantations Bhd, Hap Seng and Ta Ann Holdings Bhd as its top picks.
Meanwhile, Affin Hwang said plantation sector revenue in the second quarter 2020 had increased by 6.3 per cent YoY, as all plantation companies under its coverage posted higher yoy revenue.
This was underpinned by higher CPO average selling prices and FFB production.
"Sequentially, plantation sector revenue increased by 4.3 per cent quarter-on-quarter (QoQ), mainly due to higher revenue seen at Sime Darby Plantation Bhd, FGV Holdings Bhd, IOI Corporation and IJM Plantations.
"Higher revenue was attributable to the increase in QoQ FFB production volumes but partially offset by weaker CPO prices," it said.
Overall, Affin Hwang Capital maintained its "neutral" call on the sector with IJM Plantations and Ta Ann Holdings Bhd as its top picks, given their improving earnings prospects with rising FFB and CPO production, and stronger CPO prices.
Read more at https://www.nst.com.my/business/2020/09/622776/plantation-companies-poised-post-stronger-performance-second-half-year