PLANTATION companies can expect a bumper quarter with their 4Q 2020 year-on-year (yoy) profits to be likely lifted by high crude palm oil (CPO) and palm kernel (PK) prices which should more than offset a marginally weaker yoy output.
For companies with US debts, foreign exchange translation gains will likely lift headline profits, according to Maybank IB Research.
“And (for) those with forward sales (depending on the size and price) locked in before Dec 31 last year (to be delivered in 2021), we expect some accounting loss on fair value (FV) of derivative financial instruments (FI),” justified analyst Ong Chee Ting in a plantation sector update.
“However, these accounting losses will likely reverse in 2021. We prefer small and mid-caps in a strong CPO price environment.”
More broadly, the research house expects the industry to deliver its fifth consecutive yoy quarter of core PATMI (profit after tax and minority interests) growth for the upcoming 4Q 2020 results, underpinned by higher CPO spot prices which averaged RM3,373/metric tonne (MT) (+36% yoy; +22% quarter-on-quarter [qoq]) in 4Q 2020.
“Its by-product, PK, rallied even more to average RM2,059/MT (+42% yoy, +39% qoq),” observed Ong.
“The high selling prices more than offset the marginally weaker yoy output whereby MPOB (Malaysian Palm Oil Board) statistics revealed a mere 3% yoy drop in Malaysia’s CPO output (-18% qoq on seasonality).”
While upstream growers will do well in 4Q 2020, Maybank IB Research expects companies with higher exposure in Malaysia to generally do better than those with higher Indonesia exposures.
“This is because Indonesia changed its CPO export tax structure to progressive tax structure (compared to flat rates) in early December 2020 to raise funds for its B30 (biodiesel) mandate,” noted the research house.
“This has had the unintended effect of capping the CPO price net proceeds for Indonesia’s upstream at around RM2,800/MT.”
On the contrary, Ong expects downstream margins to be under pressure in 4Q 2020.
“We believe 4Q 2020 refining margins to be likely lower on low utilisation rates as Malaysia’s refinery utilisation rate fell sharply yoy and qoq to 62% (3Q 2020: 70%, 4Q 2019: 71%).
Malaysia has exported more duty-free CPO in 4Q 2020 ahead of the re-imposition of CPO export duty (of 8%) on Jan 1, 2021. Fortunately, the spike in CPO price (+RM867/MT in 4Q 2020) should bring about some inventory gains for refiners, thus mitigating the low utilisation rate.
“However, what could negatively surprise is if refiners (or their trading arms) aggressively enter into forward sales in 4Q 2020 with committed deliveries throughout 2021,” suggest Maybank IB Research.
“Under the accounting rules, companies with locked-in forward sales at prices below that of the last day of 4Q 2020 will likely report mark-to-market FV losses on FI in 4Q 2020.”
As such, the research house expects oleochemicals players such as IOI Corp Bhd and Kuala Lumpur Kepong Bhd to face margin erosions as evidenced by the lower average industry plant utilisation rate of 92% (3Q 2020: 100%, 4Q 2019: 96%) and rising raw material costs. – Jan 25, 2021
