A lower palm products price and higher costs a bane to profit.
The recently concluded corporate earnings season was uninspiring, in our opinion. Core earnings of more than half of stocks under our coverage missed expectations though 9% exceeded and 36% came in within expectations (Table 1). The weak ASP of palm products has negatively impacted revenue generation capability of plantation company. This was further added by higher cost of sales (being part of higher manuring and labour cost, higher windfall profit levy and states tax) which impacted margins especially for the upstream operations. Conversely, sustainability in margins and profit from the downstream manufacturing segment aided better results for IOI (Buy: TP: RM4.75). Nonetheless, margin should however normalise in the coming quarters (management guidance) despite challenging operating environment and subdued demand.
Earnings ahead are highly sensitive to production and CPO price movement.
We are of the view that upside risks to earnings this year is capped by higher operational costs and supressed profit margin given the expected moderation in ASP of palm products realised and lower-than-expected production on seasonally low yield and lower fertiliser usage in 2022. The growing risk of PO supply due to weather uncertainties (heavy rain and floods in Johor and Pahang which have impacted plantation areas) and the slow return of foreign workers, may hinder planters in Malaysia to optimise their production and hence, earnings prospects.
Given factors discussed above, we believe plantations companies under our coverage, especially the upstream players, are at risk of further earnings disappointment in the coming 1Q 2023 earnings seasons as CPO price realised is expected to be lower or to hover between RM3,800/MT-RM4,200/MT against RM4,007/MTRM5,468/MT in 1Q22 (RM3,540/MT and RM4,432/MT in 4Q22). As such, we project earnings to decline by or at average 26% YoY in 2023 against an average of +10% YoY in 2022. Nonetheless, we hold our view that CPO price may remain supported in the near term, within a range of RM3,700/MT and RM4,400/MT level possibly up to 1Q23, to be underpinned by 1) slower growth in palm oil supply on seasonally low yield and the impact of low fertiliser usage, amongst others due to poor weather and labour shortage issue, 2) resilient demand for Ramadhan and Eid Fitri in March/April, 3) favourable discount of price differential between PO and SBO prices, and 4) full economic reopening in China economy and hence, demand.
Stay NEUTRAL: Moderation in PO price remains key risk to planters’
We retain our NEUTRAL recommendation on the sector given that most companies under our coverage are at risk of further earnings disappointment on account of challenging operating environment, primarily higher operational costs and the expected moderation in palm products price. We have a BUY call on IOI (TP: RM4.75), KLK (TP: RM25.23) and SIME Darby Plants (TP: RM5.03), with a HOLD recommendation for GENP (TP: RM6.17), Sarawak Plant (TP: RM2.28), FGV (TP: RM1.50), HAPL (TP: RM1.79), TSH (TP: RM1.17) and Boustead Plants (TP: RM0.69); whilst SELL on SOP (TP: RM2.20), and non-rated for TH Plant.
Downside risks for CPO price may come from 1) a slower-than-expected economic growth and consumption of edible oils, 2) a lower-than-expected demand due to changes in government policies of importing and exporting countries, 3) a higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) unprecedented events i.e., prolonged COVID-19 pandemic with a new variant and another round of movement restriction worldwide, and protracted Russia-Ukraine conflict.
Source: BIMB Securities Research - 7 Mar 2023
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KLK2024-08-16
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KLK2024-08-15
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FGV2024-08-14
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KLK2024-08-14
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TSH2024-08-13
FGV2024-08-13
IOICORP2024-08-13
KLK2024-08-13
SDG2024-08-13
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SDG2024-08-13
SDGCreated by kltrader | Aug 12, 2024
Created by kltrader | Aug 12, 2024
Created by kltrader | Aug 09, 2024
Created by kltrader | Aug 09, 2024