Research houses maintained NEUTRAL calls on plantation sector.
RHB Investment Bank Bhd (RHB IB) maintained its NEUTRAL call on plantation sector, as 4Q23 earnings are expected to be flattish as productivity moderates, offset by stronger crude palm oil (CPO) prices.
“(We) maintain sector NEUTRAL with a tactical positive trading strategy, as we continue to expect a higher CPO price environment in 1H24, in anticipation of a weaker El Nino affecting peak output in 2H,” it said today (Dec 13).
In its Regional Sector Update, the research house said Malaysia’s November palm oil (PO) stocks dipped 1% month-on-month (MOM) to 2.42 million tonnes, as output and exports declined 8% and 6%.
“Lower production in the months ahead should be offset by softer demand in the export market, given the high stock levels – potentially leading to Malaysian PO stocks staying above the 2 million tonne mark until the year-end, at least,” it said.
RHB IB said in 3Q23 reporting season saw mostly in-line earnings, with six planters booking numbers that were within estimates, three above and three below.
“We make no changes to our CPO price assumptions for now – RM3,900, RM3,900, and RM3,800 per tonne for 2023, 2024, and 2025 respectively,” it said.
In Malaysia, output rose 24.8% quarter-on-quarter (QoQ) or 2.4% year-on-year (YoY) in 3Q23 from seasonal factors.
“For the companies we cover, we saw an average 24.8% QoQ and 4.9% YoY output increase in 3Q23. Most planters expect output to moderate QoQ in 4Q23, albeit not to a significant extent.
“Going into 2024, despite the ongoing El Nino, companies are still guiding for FFB growth, as the dry weather impact so far has not been
substantial,” it added.
Meanwhile, in Indonesia, RHB-IB saw an average 26.1% QoQ rise and a 0.1% YoY output decline for the companies we cover in 3Q23.
“As usual, the Association of Indonesian Palm Oil Producers’ (GAPKI) official 3Q23 CPO output trends differed, with a 3.5% QoQ decline and 3.3% YoY increase.
“Although weather in Indonesia has been dry in certain areas like South Sumatra and South Kalimantan, this lasted for c.1.5-2 months only in 3Q23. Going forward, Indonesian planters also expect to see a moderation of output QoQ in 4Q23, but a modest YoY growth in 2024F.”
The research house is hopeful for improved downstream margins in 2024.
“For planters with downstream operations in Malaysia, margins grew QoQ in 3Q, given the improved competitive advantage against Indonesian players due to the narrowed price spread in Indonesia.
“Indonesian downstream players’ margins weakened QoQ and YoY in 3Q23, due to the smaller tax differential between upstream and downstream products of USD48 per tonne compared to USD63 and USD87 in 2Q23 and 3Q22 respectively.
“Going forward, downstream players are hoping for a better 2024, on higher price volatility and improved demand,” it added.
Malaysia’s November PO stocks fell to 2.42 million tonnes (-1.1% MoM) as output and exports fell 8% and 6% MoM. The stock/usage (S/U) ratio is now at 13%, above the 15-year historical average of 10%.
It added, although production is set to taper off in the coming months, weakening export market demand may be likely, given the high stock levels.
“This could mean PO stocks may still exceed 2 million tonnes – potentially until the year-end, at least.”
Meanwhile, Kenanga Research said while quarterly CPO prices and earnings can be volatile, the plantation sector can be quite defensive over the longer term.
“Firstly, palm oil is largely consumed as food even though biofuel use is growing. Secondly, the sector’s gearing is low to decent, with several players even in net cash position.
“Lastly, the market value of agriculture land, especially those located along the west coast of Peninsular Malaysia are also often significantly higher than book value,” the research house said.
Kenanga said Nov 2023 palm oil output of 1.789 million metric tonne (MT), down 8% MoM, with 6% YoY increase came in within Kenanga (4%) and consensus (2%) expectations
Furthermore, average CPO price held well at RM3,701 per MT (+2% MoM, -9% YoY) amidst softening soyabean oil prices.
“We maintain our forecast 2023-24 CPO prices at RM3,800 per MT on a fragile supply-demand outlook. Trading at 1.1x PBV, the downside to the sector appears contained but El Nino has been mild thus far, so there is no strong upside catalyst,” it said.
“We project flattish CPO prices of RM3,800 per MT in CY24 with demand growth normalising at 3%-4% YoY and supply looking to stay tight.
“Meanwhile, production cost has been easing since mid-CY23 and should stay soft into CY24. El Nino has been mild so far but ageing trees are now expected to dampen palm oil yields instead,” Kenanga added.
It also said margins should improve on easier production costs, with fertiliser prices are now 30%- 40% below a year ago while fuel cost has eased by nearly 40% YoY.
“Fresh fruit brunches (FFB) harvesting is also normalising in Malaysia. Palm kernel (PK), a byproduct when milling FFB, is sold to offset 5%-10% of the cost to extract CPO.
“However, prices have been on the decline since mid-CY22, causing CPO costs to nudge up slightly. The downtrend could now be at or near the bottom and any PK price recovery in CY24 or CY25 should help contain CPO cost further.”
RHB IB continue to prefer Malaysian players over regional ones. Its top picks are Top Picks: Ta Ann Holdings Bhd (TAH), Sarawak Oil Palms Bhd (SOP), Golden Agri-Resources Ltd (GGR), and PT Perusahaan Perkebunan London Sumatra Indonesia (LSIP).
In Malaysia, RHB favours TAH, SOP, IOI Corporation Bhd and Kuala Lumpur Kepong Bhd while regionally, it prefers GGR and LSIP.
Meanwhile, Kenanga top picks among the company under its coverage are chosen for growth over income for the next 3 to 6 months.
It named Kuala Lumpur Kepong Bhd (KLK) (OP; TP: RM24.50) given its flexibility to expand upstream and downstream internationally. Rating-wise, it also offers better value compared to other larger market cap, integrated players.
It also favours PPB Group Bhd (OP; TP: RM19.30) on FY24F earnings recovery and TSH Resources Bhd (OP; TP: RM1.30) as the group has pared debts aggressively and sets to plant up 30% to 40% additional area over the next few years.
