KUALA LUMPUR (Feb 7): RHB Investment Bank has maintained its “neutral” rating on the regional plantation sector and said it expects 4Q2023 sector earnings to decline quarter-on-quarter (q-o-q) and year-on-year (y-o-y), as production output declines post-peak season and downtrending crude palm oil (CPO) prices impact on earnings.

In a note on Wednesday, the research house nevertheless said these factors should be largely reflected in the sector’s performance.

“We expect companies to post mostly in-line results this quarter, based on fresh fruit bunch (FFB) output estimates,” it said.

RHB said that q-o-q FFB output was lower, post-peak season while spot CPO prices contracted slightly.

“In Malaysia, FFB output of the companies under our coverage dipped by an average of 0.6% q-o-q, while spot CPO prices contracted by 2.6% q-o-q in 4Q23.

“In Indonesia, we estimate that 4Q23 FFB output for stocks under our coverage fell by a much larger 11.9% q-o-q (based on seasonal trends) while CPO prices — net of taxes — decreased by 2.2% q-o-q.

“We believe the larger decline in output in Indonesia was due to the dry weather seen in Kalimantan and South Sumatra in 3Q,” it said.

RHB said that y-o-y, there should be lower earnings for planters in both Malaysia and Indonesia, given the higher leverage CPO prices have on earnings versus output.

“In Malaysia, while average FFB output rose by 4.5% y-o-y in 4Q23, spot CPO prices dropped 5.8% y-o-y.

“In Indonesia, FFB output is estimated to have risen 3.4% y-o-y in 4Q23, but net CPO prices fell 11.1% y-o-y,” it said.

RHB said it continues to prefer upstream players for now, with its top picks being Ta Ann Holdings Bhd and Sarawk Oil Palms Bhd in Malaysia, Bumitama Agri Ltd and Golden Agri Resources in Singapore, and PT PP London Sumatra Indonesia Tbk in Indonesia.