United Malacca’s Sluggish Start From Soft CPO Price

United Malacca Berhad 1QFY23 core net profit of RM25.6m came in at 24% and 22% of full-year forecast and consensus full-year estimate, respectively. However, Kenanga considers the results below expectation as it expects weaker earnings ahead.

Historically, UMCCA enjoys peak FFB harvest during the 2Q with 4Q the weakest; thus not surprisingly, 1QFY23 production grew seasonally. However, the improvement in harvest was not enough to counter the negative impact of softening CPO prices. Nevertheless, earnings remained healthy and cash flows robust. Hence, the group’s net cash improved from RM8 million as of end-April 2022 to RM40m.

Since June 2022, palm oil prices have dipped by over 30% in anticipation of seasonal supply recovery. Annual harvesting season is now peaking for palm while US soybean harvest is just starting. This season’s supply recovery is fragile and a good South American soybean harvest will be required for a more convincing recovery. Unusually, the demand which normally expands by 3-4% YoY has been subdued by Covid-19 since 2020 to about 1% or less. However, demand is likely to revert back to its 3-4% trendline growth and if it occurs in 2023, most of the anticipated supply for the coming season will be absorbed.

Meanwhile, some supportive factors underpinning palm oil prices include the current unusually steep discounts to soyabean oil prices, firm Indian demand pending the Deepavali celebration in late October and firmer biodiesel demand are also taking shape. Indonesia is not only the world’s largest user of palm oil but also of palm biodiesel. It already runs a B30 blend and was actually aiming to replace it with a higher B40 mix this year.

However, the road test was postponed in Feb 2022 due to high palm oil prices then but it has since resumed in late July, so the eventual implementation might take place in 2023. Forecasts. All in all, Kenanga is keeping its forecast average CPO price of RM4,000/MT for FY23 and RM3,800/MT for FY24 for UMCCA. But will be adjusting down FY23F and FY24F core EPS, from 51.3 sen to 48.2 sen and 43.9 sen to 40.5 sen, respectively, on higher costs especially fertiliser costs which UMCCA had managed to contain in FY22.

Kenanga maintains UMCC as MARKET PERFORM but downgrades TP from RM5.90 to RM5.30 based.

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