The analysts from RHB Group Research, which includes the Singapore research team, are remaining “neutral” on the plantation sector with the peak season now fizzling out.
“With Indonesia’s levy-free policy being potentially extended to the year-end, Malaysian stock levels may stay high, thereby pressurising crude palm oil (CPO) prices. This situation is worth monitoring, however, as Malaysia’s peak season has already started to disappoint,” the analysts write.
To this end, the analysts see the planters' earnings for the 3QFY2022 season to decrease q-o-q across the board due to the lower CPO prices.
“In Malaysia, although fresh fruit bunches (FFB) output for the companies under our coverage rose by an average 14.9% q-o-q, this should be offset by spot CPO prices which fell 38% q-o-q,” the analysts note.
“In Indonesia, we expect 3Q to also see a strong q-o-q recovery in output, based on the trend in 2Q. However, CPO prices net of taxes also fell 18% q-o-q (despite the impact of the levy-free period effective mid-July), which would mean lower q-o-q earnings overall,” they add.
That said, based on the analysts’ estimates of production output alone, most companies within RHB’s coverage could post earnings that are in line with the analysts’ expectations.
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“However, there could be two that may book results that are below estimates based on FFB output, namely IOI and PP London Sumatra Indonesia. Nevertheless, as it is only the 1QFY2023 for IOI, there could be a turnaround in output trends in the later quarters,” the analysts write.
On a y-o-y basis, however, Malaysian planters could see lower y-o-y earnings for the 3QFY2022 reporting season as spot CPO prices fell by 10% y-o-y and average FFB output stood 1.4% lower on a y-o-y basis. Meanwhile, in Indonesia, planters should report higher 3QFY2022 earnings y-o-y due to the improvement in FFB output with net CPO prices remaining relatively flat given the change in the tax levy structure.
In their report, the analysts see margins for Indonesian planters with downstream operations to improve in the 2HFY2022 since the Indonesian government has extended the tax levy holiday to end-October from end-August. The levy, is likely to be extended to the end of the year.
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In Malaysia, planters’ stock levels could remain high till Indonesia’s tax-free holiday ends, although the “disappointing peak output” in Malaysia may “may alleviate the situation in the coming months, due to the unresolved labour shortages”.
Malaysia’s palm oil output rose by a mere 2.6% m-o-m in September while inventory rose 10.5% m-o-m to 2.32 million tonnes despite exports rising by 9.3%.
In addition to the analysts’ “neutral” call, they have kept their CPO average selling price (ASP) estimates unchanged at RM5,100 ($1,570.01) per tonne for 2022 and at RM3,900 per tonne for 2023.
One of the analysts’ top picks includes Wilmar International, which they have kept their “buy” call on. The analysts have given Wilmar International a target price of $4.95.
As at 12.20pm, shares in Wilmar are trading 9 cents lower or 2.47% down at $3.56.
