Perfect storm for oil palm stocks?
Khairul Khalid 
The fluctuation in CPO price caused by shifts in the weather is quite normal in the industry

Crude palm oil (CPO) price is trending up again. From RM2,578 per tonne on June 22, it rose to RM2,767 on Nov 8 and is poised to breach the RM3,000 mark soon.

And that’s good news for listed oil palm stocks, with many of their share prices rising gradually in recent months. Felda Global Ventures Holdings Bhd (FGV) has gained 8% since June 22 to RM1.89 on Nov 6, Sime Darby Bhd has risen 5.4% and IOI Corporation Bhd is up 2%.

TA Ann Holdings Bhd and United Malacca Bhd are also up 7% and 17% respectively during the same period. There could be cheer for shareholders if CPO price continues its uptrend.

Unpredictable weather conditions, especially with La Nina phenomenon possibly wreaking havoc and promising a very wet season the next few months, could push CPO price higher leading into 2018.

Some industry analysts forecast the price to breach RM3,000 before year-end. Investors who are keeping a close tab on major listed plantation counters are wondering if the time is ripe to expand their exposure to these stocks.

However, an industry player tells FocusM the possible upside to CPO price caused by La Nina could be tempered by news that the European Union (EU) will impose curbs on imports of Malaysian palm oil soon.


EU move may cancel CPO price upside

“The fluctuation in CPO price caused by shifts in the weather is quite normal in the industry. Last year, it was the dry season caused by El Nino. This year, it’s the opposite with La Nina causing heavy rains and flooding.

“It remains to be seen if La Nina will have a significant impact on production. Whether CPO price will hit RM3,000 per tonne or more will depend a great deal on this, but it won’t be the sole factor.

“Curbs on production will increase CPO price but that could be negated by the EU policies, if they are ratified. There is a real strong possibility that any gains from La Nina may be offset by the EU decision which could have a substantial effect on demand. Exports are a big market for Malaysian palm oil producers, especially to countries like India and China,” says the industry player.

Year-to-date, CPO price has fallen 15.7%. On Jan 3, it traded at RM3,252 per tonne due to shrinking production caused mainly by the draught inducing El Nino last year. The price gradually fell by the middle of this year, but has since rallied.

However, not all major plantation players have seen their share prices rise in tandem with CPO price since the middle of the year. Kuala Lumpur Kepong Bhd (KLK) and Boustead Plantations Bhd have stayed flat since June while TH Plantations Bhd has fallen 2%.

“The fact that their share prices have not risen could be due to other factors such as earnings and weak market sentiment. Nevertheless, there could still be upside for these plantation companies if La Nina leads to significant production cuts,” a local analyst tells FocusM.

The EU has been at loggerheads with the oil palm industry for many years and has tried several times in the past to restrict palm oil imports. In its latest move, members of the European Parliament are set to ratify the proposed resolution to curb imports of palm oil into the EU next month. Malaysia stands to lose as much as RM10 bil in palm oil exports if the resolution is passed.

The European Parliament recently also voted to introduce a single certification scheme for palm oil entering the EU market, apart from phasing out the use of palm oil biodiesel by 2020. The bulk of Malaysia’s palm oil exports to the EU is used for biodiesel.

The EU is Malaysia’s second-largest export market after India, accounting for 2,059,207 tonnes of palm oil products last year, according to the Malaysian Palm Oil Board (MPOB).


Rising oil price ‘X factor’

The analyst also cautions that another “X factor” or external pressure on CPO price could be rising crude oil prices.

“The recent events in Saudi Arabia have jolted the markets and led to higher CPO price. This in turn may lead to a stronger ringgit. If this is sustained over the long run, the stronger ringgit could make it more expensive to purchase palm oil and may impact demand,” says the analyst.

Crude oil price has risen by as much as 3.5%, surging above US$64 per barrel on Nov 6, its highest level in two years, following the corruption crackdown in Saudi Arabia this month.

News on the crackdown, including the arrest of a few prominent members of the Saudi Arabian royalty with substantial business interests overseas, took the market by surprise.

Any political upheaval in Saudi Arabia could destabilise supply in the oil markets and send prices upwards. Saudi Arabia is a leading member of the Organisation of the Petroleum Exporting Countries (OPEC) and pumps more than 10% of crude oil produced worldwide.

Palm production in Malaysia is expected to be between 19 million and 19.5 million tonnes in 2017 (vs 14.1 million in the first nine months)

Based on a plantation sector report by TA Securities, industry experts are mixed on whether CPO price will breach the RM3,000 mark in the coming months.

TA Securities cites Abdul Rasheed Janmohammed, chief executive, Westbury Group and PEOC, as saying at a palm oil conference in Indonesia last month that palm production in Malaysia is expected to be between 19 million and 19.5 million tonnes in 2017 (vs 14.1 million in the first nine months).

Abdul Rasheed said while most industry players expect improvement in production, supply remains very tight.

“For Q4 2017 or Q1 2018, the demand will likely be an issue as China may reduce its palm oil consumption due to the winter season. He (Abdul Rasheed) expects CPO price to trade between RM2,700 and RM2,900 per tonne until March 2018.

“Subsequently, the price will depend on how production will catch up through Q2 of 2018 and (with) the demand for the Ramadhan season, which falls in May next year.”

Another prominent plantation analyst Dorab E Mistry, director of Godrej International Ltd, is more optimistic and expects CPO price to reach RM3,100 per tonne by next year and by another US$50 if South America’s soybean crop is affected.

Mistry expects palm oil stocks to decline each month from January leading to tightening of palm oil stocks. He forecasts CPO price to touch US$800 (RM3,381) per tonne by January, with the potential to hit US$850 (RM3,592) by March.

September end-stocks in Malaysia, the world’s second-largest producer of palm oil after Indonesia, breached the two million tonne mark for the first time in over a year. Nevertheless, stockpiles remain below the September levels of 2014 and 2015.

Mistry also revised downwards his palm oil production outlook for Malaysia and expects production to be in the range 
of 19.1 million to 19.3 million tonnes. For 2018, he expects production to increase slightly to 19.97 million.

He also expects long-term gains in plantation and palm oil prices based on limitations to acreage expansion. “Malaysia has reached the limit. Indonesia now has a moratorium. Expansion has slowed from 500,000ha to 150,000ha per year. From 2021 to 2022, plantation and palm oil prices will rise much higher.”

High CPO price until Q1

TA Securities expects CPO price to remain high until Q1 of 2018 due to lower-than-expected production and tight inventory. However, the price may taper off in the second half-year as demand fades and seasonal higher production kicks in.

“For this reason, we expect the average CPO price to be RM2,800 per tonne in 2018. We could review our assumption if South American’s soybean supply turns out lower than market expectations and La-Nina sets in.”

The report also points to the United States Department of Agriculture’s report on corn and soybean crop and the outcome of the Environmental Protection Agency on biofuel quotas for 2018 by end-November as key price factors to watch out for.

“Higher production costs and lower production may offset some of the positive impact on CPO price. We are keeping our neutral call on the sector,” it says.

It also highlights three future re-rating catalysts, including extreme weather change, which leads to higher CPO price, downward revisions in soybean production estimates, and better-than-expected demand from China and India.

TA Securities maintains its buy recommendation on IJM Plantations Bhd, United Malacca, hold on KLK, Sime Darby, Kumpulan Fima Bhd and sell on IOI Corporation and FGV due to pricy valuations.

Another sector report by MIDF Research last month was more optimistic about the market for palm oil next year and was bullish about prospects for plantation companies.

“Demand outlook for palm oil is better for 2018. We estimate global palm oil consumption to increase by 4.0% or +2.56 million tonnes to 66.49 million tonnes. This is expected to surpass the growth of 2.5% or +1.55 million tonnes in 2017 to 63.93 million tonnes. The higher palm oil consumption is in line with better economy conditions expected for 2018,” it said.


Strong Q3 earnings

MIDF said a strong set of earnings is expected in the November results season, adding that third quarter results should be good for planters.

“We expect stronger earnings year-on-year (yoy) due to the increase in palm oil price by 3.3% yoy in 3QCY2017 to RM2,681 per tonne and better palm oil production by +8.3% yoy.

“The outlook for sequential earnings growth is also good as the strong production growth of 14.5% should more than offset the palm oil price decline of 2.4%,” it added.

MIDF has upgraded 2018’s average palm oil price assumption to RM2,900 per tonne from RM2,725 based on several assumptions, including higher soybean oil price, better demand for palm oil and weaker supply growth.

For this year, it has increased its average CPO price estimate to RM2,825 to RM2725. “There is further upside potential if a strong La Nina happens by year-end. The Australia Bureau of Meteorology has activated its La Nina Watch with 50% chance of La Nina forming in late 2017.

“If La Nina is confirmed, we expect excessive rains in Malaysia and Indonesia which usually cause floods. The production in flood-prone states may be affected. Overall, the news is slightly positive to palm oil price but the magnitude of impact will depend on whether La Nina eventually materialises and its intensity.

“Coupled with a labour shortage problem which is still affecting the industry, we expect palm oil price to surge to RM3,500 per tonne if a strong La Nina materialises by year-end,” said MIDF.

Typically La Nina impact on Southeast Asia is wetter-than-normal rainfall conditions, especially during the Southwest Monsoon period (June – September), including October.

The La Nina climate pattern – a natural cycle marked by cooler-than-average ocean water in the central Pacific Ocean – is one of the main drivers of weather in the US and globally, especially during the late fall, winter and early spring.

MIDF said a potential increase in soybean price next year could work in palm oil’s favour and swing demand to the sector. “Soybean production should decline for both Brazil and Argentina in 2018. With US soybean harvesting progressing well with 70% harvested as of Oct 22, the market is shifting focus to the production prospect in South America.

“We gather that soybean production is likely to decline in Brazil and Argentina in 2018 due to unfavourable weather. In Brazil, as much as 50% of the areas intended for soybean planting are too dry and planters have delayed their plantings.

“The dryness is critical in all key soybean planting states across Brazil and this has prompted CONAB (Companhia Nacional de Abastecimento or Brazil National Company of Supply) to estimate a drop of 5.4% in soybean production to 108.3 million tonnes for 2018,”

MIDF’s top pick for the sector is IOI Corporation due to overall margin improvement at its group level after the sale of a 70% stake in Loders Croklaan and the special dividend of 13 sen per share. Its net gearing is expected to decline significantly to 0.25x (from 0.78x).

The research house also has a buy call on KLK, Genting Plantations Bhd, TSH Resources Bhd, Ta Ann Holdings and Fima Corporation Bhd.

Major listed plantation players

1. Sime Darby Bhd

Sime Darby was incorporated in 1910 as a small British company managing 202ha of rubber estates in Melaka. Today, it has grown into one of the country’s largest conglomerates with operations in 26 nations. It is involved in five core sectors, namely, plantations, industrial equipment, motors, property and logistics. Its controlling shareholder is Permodalan Nasional Bhd.

Sime Darby is in the process of demerging its plantation and property divisions, targeting to list both as separate units by end-November.

As of June 30 (FY17), Sime Darby Plantation had a total land bank of one million hectares.

In FY17, it posted RM14.76 bil revenue and RM1.97 bil profit before interest and tax, from RM11.87 bil and RM1.02 bil respectively in FY16.

Year-to-date, Sime Darby’s share price is up 11% since Jan 3, but down 5% since June 22. TA Securities has a hold recommendation on the company with a target price of RM9.80.

Sime Darby chairman is ex-Johor Menteri Besar Tan Sri Abdul Ghani Othman with Tan Sri Mohd Bakke Salleh (pic) as president and group CEO.

After the restructuring and listing of Sime Darby Plantation, Abdul Ghani will be its new chairman, while Mohd Bakke will take on the role of executive deputy chairman and managing director of the plantation unit.

Datuk Franki Anthony Dass, current managing director of Sime Darby Plantation, will be redesignated chief adviser and value officer.


2. Felda Global Ventures Holdings Bhd (FGV)

FGV, controlled by the Federal Land Development Authority (Felda), was listed in 2012. It has 450,000ha oil palm estates producing 2.66 million tonnes of crude palm oil (CPO).

In FY16, FGV posted RM17.24 bil revenue and RM29.6 mil net profit, from RM15.56 bil and RM188.79 mil respectively in FY15.

Apart from the palm upstream and downstream clusters, the group’s other core businesses include rubber, sugar, research and development and agri-services, trading and marketing, as well as logistics.

Its share price is up 12% since Jan 3 and 7% since June 22. Hong Leong Investment Bank has a hold recommendation on the counter with a target price of RM1.67.

FGV chairman is Datuk Wira Azhar Abdul Hamid and group president/CEO is Datuk Zakaria Arshad (pic).


3. Kuala Lumpur Kepong Bhd (KLK)

KLK started over 100 years ago and was listed in 1974 in Malaysia, Singapore and the UK. Its core businesses are rubber and oil palm plantations.

It has over 270,000ha of plantations in Malaysia, Indonesia and Liberia. For FY16 ended Sept 30, it posted RM16.5 bil revenue and RM1.59 bil net profit from RM13.64 bil and RM869.91 mil respectvely in FY15.

Its share price has gained 3% since Jan 3, but flat since June 22. AllianceDBS Research has a hold recommendation on the counter with a target price of RM24.75.

The company’s CEO is Tan Sri Lee Oi Hian (pic).

4. IOI Corporation Bhd

IOI Corp is involved in plantations and resource-based manufacturing. Its plantation business covers Malaysia and Indonesia. Its resource-based manufacturing business comprises three segments, namely, refineries, oleochemicals and speciality oils and fats.

For FY16 ended June 30, the company had 217,917ha of oil palm estates, about 66% in East Malaysia, 25% in Peninsular Malaysia and 9% in Indonesia.

In FY17, the group posted RM14.12 bil revenue and RM743.2 mil net profit, compared with RM11.73 bil and RM629.7 mil respectively in FY16.

On Sept 12, the company entered into a sale and purchase agreement with Bunge Ltd via its subsidiary, Koninklijke Bunge BV to sell a 70% controlling interest in Loders Croklaan Group BV and its related businesses for a consideration of €297 mil plus US$595 mil, subject to certain adjustments.

This values the entire Loders and its related businesses at €425 mil plus US$850 mil, net of external debt and cash and including normalised working capital. The transaction is expected to be completed in the next 12 months. After the disposal, the company will retain a 30% equity interest in Loders.

Year-to-date, IOI Corp share price has risen 2% since Jan 3 and 1% since June 22. Public Investment Bank maintains its neutral call on the counter with a target price of RM4.65

The group was founded by Tan Sri Lee Shin Cheng, who is also executive chairman and controlling shareholder. His son Datuk Lee Yeow Chor (pic) is CEO.


5. TH Plantations Bhd

TH Plantations, the plantation arm of pilgrim fund Lembaga Tabung Haji, is involved in oil palm and rubber plantations.

It was incorporated in 1972 as Perbadanan Ladang-Ladang Tabung Haji Sdn Bhd with its first estate Ladang Sungai Mengah covering 4,054ha.

It operates 36 oil palm estates nationwide and seven forestry plantations in Sabah. It also has over 8,000ha in Kalimantan Timur, Indonesia with six palm oil mills with a total milling capacity of 240 tonnes per hour.

For FY16 ended Dec 31, the company had a total planted area of 102,000ha. External customers for the oil palm plantations segment accounted for the bulk of the group’s revenue.

The company posted revenue of RM562.3 mil and net profit of RM147 mil from RM455.3 mil and RM62.13 mil respectively in FY15.

Year-to-date, its share price is down 1% since Jan 3 and 2% since June 22.

The company’s chairman is Tan Sri Abdul Aziz Kasim with Datuk Zainal Azwar Zainal Aminuddin (pic) as CEO.


6. Boustead Plantations Bhd

Boustead Plantations, controlled by the Boustead Group, was incorporated as The Kuala Sidim Rubber Company Ltd in 1946. It was then involved in cultivating rubber and management of rubber estates in Malaya.


Today, the company owns 41 oil palm estates – 19 in Peninsular Malaysia and 22 in East Malaysia – with a total land bank of 82,000ha. It also has 10 palm oil mills nationwide.

The company’s peninsula operations comprise a land bank of 26,500 ha, of which 24,900ha are planted with oil palm with an average age profile of about 13 years.

For FY16 ended Dec 31, Boustead Plantations posted a revenue of RM707.87 mil and net profit of RM227.79 mil versus RM615.19 mil and RM78.61 mil respectively in FY15.

In October, the company signed an agreement with Dutaland Bhd to acquire 42 parcels of leasehold plantation land in Labuk and Sugut districts in Sabah for RM750 mil.

Year-to-date, the counter is down 2% since Jan 3 and 1% since June 22. Although Affin Hwang Capital has not rated Boustead Plantations, it says the company has one of the highest dividend yields among plantation companies.

The company’s chairman is Gen (R) Tan Sri Mohd Ghazali Che Mat while its CEO is Fahmy Ismail (pic).


This article first appeared in Focus Malaysia Issue 258.