2Q23F should be another disappointing quarter for the plantation sector, earnings-wise, but RHB Research (RHB) believes this will be largely overlooked as investors anticipate better prospects in 2H23F.
“Malaysia’s July palm oil (PO) stocks rose 0.7% MoM to 1.73m tonnes as output lifted 11.2% MoM. We expect a gradual improvement in Palm Oil (PO) stocks in the coming months, as the peak output season continues – partially offset by restocking activities,” said RHB in the recent Regional Sector Update Report.
QoQ, while Fresh Fruit Bunch (FFB) output was generally higher, it should be offset by lower Crude Palm Oil (CPO) prices, which has a larger leverage.
In Malaysia, FFB output for companies under our coverage rose by an average 4.8% QoQ in 2Q23, while spot CPO prices fell 4.4% QoQ.
“In Indonesia, we estimate 2Q23 FFB output for stocks under our coverage was up 5.7% QoQ, but CPO prices, net of taxes, fell 5.6% QoQ,” said RHB.
YoY, RHB should see the same declining earnings trend given lower CPO prices. In Malaysia, average FFB output fell by 5.5% YoY in 2Q23, while spot CPO prices dropped 40.5% YoY. Indonesia’s FFB output is estimated to be flattish YoY in 2Q23, while net CPO prices fell 22.4% YoY.
“We expect Malaysian and Indonesian planters to post weaker QoQ and YoY earnings in 2Q23,” said the research house.
2Q23F is likely to bring earnings below expectations for most planters, based on RHB’s estimates of production output alone given the seasonally weaker output.
Three may underperform full-year forecasts based on FFB output (Sime Darby Plantation, First Resources, Bumitama Agri), while two JCI-listed planters have already released results that missed forecasts.
“We expect the remaining five planters to be largely in line. For planters with downstream operations in Indonesia, we expect margins to weaken QoQ in 2Q23 due to a smaller tax differential between upstream and downstream products,” said RHB.
Conversely, Malaysian downstream counterparts may see slightly better QoQ margins due to reduced competition from Indonesia. Malaysia’s July PO stocks rose to 1.73m tonnes as production grew 11.2% MoM, while exports rose 15.5% MoM.
“We expect gradual improvement in PO stocks as output rises in 2H, partially offset by restocking activities. Preference for Indonesian PO persists,” said the research house.
In YTD-June, Malaysia’s export growth to India and China was at -11.9% and +10.6% YoY, while India’s and China’s total PO imports jumped 17% and 96% YoY.
RHB maintains the Neutral sector call, with a tactical positive trading strategy.
“We make no changes to our MYR3,900/tonne CPO price assumption for 2023 and 2024. We continue to prefer Malaysian players vs regional players as Indonesia’s tax structure and currency appreciation makes earnings less competitive vs Malaysia,” said RHB.
Top picks by RHB include Kuala Lumpur Kepong, IOI Corp, Sarawak Oil Palms, and Ta Ann. For regional flavour, the research house prefers integrated exporters like Wilmar International and Golden Agri.
