With the 4Q19 results season having recently concluded, out of 10 stocks under our coverage, 3 companies were within expectation with 3 above and 4 came in below our expectation. Among those that were below our expectations, THP made a bigger yoy losses due to lower margins with further impairments recognised for plantation assets. While the others i.e. SDPL, FGV and TSH’s poorer performance was due to lower plantation’s margins, lower production (SDPL), losses in sugar business (FGV) and cost factors owing to the higher operational costs, depreciation and finance costs as well as effective tax rate (TSH).
During the period, we made earnings downgrade to SDPL (imputing lower production with costs of sales and operating expenses assumption higher) and FGV (on lower sales volume and higher costs) with others remain unchanged. We expect performance of pure plantation companies to remain favourable given current palm products prices currently trading above 1Q19’s average prices. Nonetheless, there might be high possibility of margins squeeze in downstream players as demand and price concerns heighten. We foresee CPO price in 1Q20 to trade within a range of RM3,111/MTRM2,300/MT against RM2,153/MT-RM1,834/MT realised in 1Q19.
A lower ending PO stock level would not benefit CPO price if export continues to slow or demand remains muted. According to our economist, the trend in international trade flows weakened with rate of contraction at the steepest since 2009, noticeably during February. Slowdown in key export markets, notably China, appears to have played a major role in both limiting supply and demand for Malaysia’s exports. Nonetheless, we see potential upside to upstream margin with V-shaped recovery in PO prices expected once the Covid-19 epidemic subsides - as the disruption in supplydemand chains will lead to firms to increase their use of current stocks, hence, encouraging restocking activities. Currently 3-mths the Bursa Market Derivatives CPO price is trading at RM2,321/MT while SBO price is at USD28.91 cents/bushel.
Maintain Neutral on the sector with unchanged average CPO forecast for 2020 of RM2,480/MT. Variances in earnings forecast would be due to lower-than-expected production, ASP realised of palm products and higher-than-expected costs. Risk factor would include 1) lower-than expected demand due to changes in government policies of importing countries, 2) weakening of crude oil prices, and 3) unforeseen market changes i.e. Covid-19.
Source: BIMB Securities Research - 3 Mar 2020
Chart | Stock Name | Last | Change | Volume |
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Created by kltrader | Jul 17, 2024
Created by kltrader | Jul 17, 2024
Created by kltrader | Jul 17, 2024