MOST planters will likely report flattish/weaker performance on quarter-on-quarter (qoq) basis for 1Q 2022 as higher-realised palm product prices will be weighed down by seasonally lower fresh fruit bunches (FFB) output and higher fertiliser costs.
However, Hong Leong Investment Bank (HLIB) Research expects the seasonally weaker FFB output to be partly mitigated by higher crude palm oil (CPO) prices (this is given six out of seven planters under its coverage clocked in lower FFB output during the quarter).
Plantation companies will start reporting their quarterly financial results starting from May 20.
Zooming in on selected individual planters, HLIB Research expects Genting Plantations Bhd (GENP) to likely report flattish qoq performance as higher palm product prices and improved joint venture contribution will be offset by (i) higher fertiliser cost; (ii) a 15.2% qoq decline in FFB output; and (iii) potentially weaker downstream performance (arising from high feedstock costs).
Likewise, Sime Darby Plantation Bhd , too, is expected to report flattish qoq performance in 1Q 2022 as higher palm product prices and sustained performance at its downstream segment will likely be moderated by (i) higher fertiliser cost; and (ii) lower FFB output (-10.1% due mainly to lower output from Malaysia estates).
Meanwhile, TSH Resources Bhd’s core earnings will likely come in lower in 1Q 2022 given marginally higher FFB output (+0.8%) and better palm product prices will likely be offset by higher production cost and muted performance at cocoa segment.
However, HLIB Research expects higher CPO prices to drive 1Q 2022 performance on a year-on-year (yoy) basis.
“Planters will likely register higher yoy upstream earnings in their upcoming results on the back of significantly higher CPO price (>50%) which more than mitigated (i) higher production cost (arising mainly from higher fertiliser prices); and (ii) mixed FFB output (with four out of seven planters under our coverage clocked in yoy growth in their FFB output),” projected analyst Chye Wen Fei in a plantation sector update.
“As for the integrated players, we believe volatile feedstock prices, coupled with elevated freight cost will likely hinder profitability at (their) downstream segment.”
HLIB research expects palm oil prices which has averaged circa RM6,300/metric tonne (MT) year-to-date (YTD) to remain at elevated levels for a while, supported by supply disruption of major vegetable oils arising from less favourable weather conditions, geopolitical tension and protracted fertiliser supply.
“We maintain our 2022-2024 CPO price assumptions of RM5,500/RM4,500/RM4,500 per MT,” noted the research house.
All-in-all, HLIB Research retained its “overweight” outlook on the plantation sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects); (ii) easing environment, social & governance (ESG) concerns; and (iii) decent valuations.
Its top picks remain FGV Holdings Bhd (“buy”; target price: RM2.43); IOI Corp Bhd (“buy”; TP: RM5.09); Kuala Lumpur Kepong Bhd (“buy”; TP: RM32.43) and Sime Darby Plantation (“buy”; TP: RM5.95). – May 18, 2022
