PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 13 Aug 2020, 10:59 AM


Plantations - Seeing Better CPO Prices In 2H

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Despite seeing stronger demand from China and India, Malaysian palm oil industry continued to suffer from poor CPO price performance in the 1H due to excess supplies in the local market while facing stiff competition from Indonesian counterparts. Worse still, palm kernel prices fell at a sharper pace than CPO prices, resulting in higher operating cost for the players. The significant decline in margins has caused small and inefficient players to be in the loss-making position. Nevertheless, we are seeing silver lining as we expect a recovery in the CPO prices in the coming months on the back of stronger demand from local and exports markets. Hence, maintain Neutral call on the sector outlook but with a trading range of RM2,100/mt-2,300/mt towards the year-end.

  • Double whammy for plantation players. Plantation sector has gone through a tough ride in 1H 2019 as it suffered from excess supply condition in Malaysia. YTD CPO price averaged at around RM1,995/mt (YoY: -18%). Apart from being dragged with the weaker CPO selling prices, plantation companies also struggled with rising production cost due to weaker palm kernel price and an increase in both fertilizer and labour costs.
  • Diversification eases the bruise. During the CPO price downtrend, it would be vital for plantation companies to have diversified earnings from businesses such as biodiesel, electricity sales, timber and/or downstream plantations to partly cushion the steep fall in upstream plantation earnings. FGV has recently indicated its interests to diversify into other types of plantations such as durian while some has mooted the idea of monetizing landbank.
  • Strong efforts needed to address the high inventory levels. At the current POGO spread of USD100/mt, it would be commercially viable to push for biodiesel production as it requires little subsidy from the government. Government should also target more sectors to widen the use of biodiesel especially the industrial sector, which has been suffering from the electricity and gas tariff hike. Incentives should also be given for those who are willing to use biodiesel as the main burning fuel. Apart from that, government can also use palm oil as part of the barter trade deals with other nations to reduce the cash outflows while it can help ease the high inventory level immediately. There is a need of concerted efforts from all parties to help tackle the oversupply issues especially on the domestic biodiesel progress, which seem like far lagging behind Indonesia. Poor perception on the use of palm oil ingredient in Europe should also be addressed.

Source: PublicInvest Research - 18 Jun 2019

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