Total CPO fresh fruit bunches (FFB) production for companies under coverage dipped by 1% yoy from 3.44m tonnes in 1Q23 to 3.40m tonnes in 1Q24.
CGS International’s (CGS) Sector Note today (May 8) said this was due to heavy rain at end-Dec 2023 continuing into Jan 2024, which dampened harvesting activities.
Nonetheless, total CPO production for companies under CGS’s coverage rose 40% yoy to 1.2m tonnes in 1Q24 due to higher oil extraction rate (OER), resulting from better quality of harvested FFB, supported by the return of foreign labour to the estates.
Both FFB and CPO production fell by 23% qoq in 1Q24 due to seasonal factors, such as fewer working days and reduced labour force during Ramadan in Mar 2024.
Average CPO price was stable yoy
According to data from Malaysia Palm Oil Board (MPOB), average CPO price was steady yoy at RM3,983/MT in 1Q24, vs. RM3,997/MT in 1Q23
CGS cited that the average CPO price remained above the RM3,900 level in 1Q24 due to lower palm oil (PO) inventory on lower imports and strong domestic consumption during the festive period.
Improvements in yoy results expected for upstream players
Given improved CPO production yoy, relatively stable average CPO prices, and decreasing fertiliser costs, CGS expects companies with 70-100% of revenue from the upstream segment to report robust 1Q24F results, namely Genting Plantations, Hap Seng Plantations, Sarawak Plantation, and Ta Ann.
However, CGS thinks that a slowdown in the manufacturing/ downstream segment could affect the 1Q24F results of IOI, KLK, and FGV, although they could improve qoq off a low base in 4Q23.
Reiterate sector Neutral with GENP and TAAN as CGS sector top picks
CGS stays sector Neutral as they see good support for CPO prices at the RM3,800/MT level, recovery in production, decreasing fertiliser costs and reasonable valuations at 18x FY24F P/E (especially for the predominantly upstream players).
CGS maintains their 2024F average CPO price of RM3,700/MT as CPO prices could trade slightly lower in 2H24F with the higher PO inventory levels.
CGS’s top picks are 1) GENP (Add, TP: RM6.62, CP: RM6.06) for its strong net profit rebound over FY24-26F driven by the plantation segment and stable property outlook, and 2) TAAN (Add, TP: RM4.53, CP: RM3.88) for its attractive valuation.
