SINGAPORE (May 29): UOB Kay Hian says 1Q19 was another weak quarter of earnings for plantation companies largely due to subdued palm and palm kernel oil prices.
Although companies with older palm trees reported weaker y-o-y production, most companies are guiding for higher FBB production for the rest of 2019, especially 2H19.
This means 1Q19 earnings would likely have hit the bottom this year.
“We expect stronger earnings in 2H19, driven by better production and higher ASP. Maintain ‘market weight’,” says UOB analyst Leow Huey Chuen.
Leow says weak 1Q19 earnings were driven by lower ASP and higher operating cost.
For Bumitama Agri (BAL), this was mainly due unexpectedly high selling and financing costs although logistics expenses should normalise by 2Q19.
For First Resources (FR) and Golden Agri Resources (GGR), earnings came within expectations. FR’s revenue grew 10.4% y-o-y, boosted by higher sales volumes but partially offset by lower ASP.
Wilmar International’s earnings were above expectations, thanks to better performance from the tropical oils and sugar segments despite low soybean crushing and commodity prices.
Based on data from company announcements, 1Q19 FFB production of the 11 companies that UOB monitors rose 4.0% y-o-y but fell 18.8% q-o-q.
Among them, only Wilmar and FR had lower y-o-y FFB production as both companies have more oil palm trees that are above 15 years old. Their FFB yields are also not expected to recover back to their prime yield prior to the 2015 El Nino.
Meanwhile, younger oil palm trees are expected to continue to show recovery in FFB yields.
In the next three quarters, Leow expects better selling prices and higher production to support higher earnings.
Although CPO prices are still relatively weak at this point, Leow believes prices should recover gradually and close higher for the year.
This combined with higher production over the next three quarters as guided by companies, 2H19 earnings should be much higher than in 1H19.
During the briefings, companies mentioned that due to the drastic weather changes since the 2015 El Nino, companies are looking at higher-than-usual production in 2H19.
Most are guiding for the production ratio in 1H:2H at 40-42:58-60 vs the norm of 45:55.
Since 2015, Leow says companies are cutting back in new planting and some are focusing on replanting older-age area with higher yielding trees.
The annual new planting targets range from 1,500ha to 2,000ha for most of the companies.
For 1Q19, BAL planted only about 29ha. GGR plans to replant 15,000ha for 2019. In 1Q19, GGR replanted 2,200ha with higher-yielding seeds to sustain long-term production growth.
“We maintain our view that CPO prices in 2019 will be stronger on the back of: a) lower production, b) strong demand for biodiesel, c) lower soybean crushing, and d) lower rapeseed and canola production. Our CPO price assumption for 2019 is RM2,350/tonne,” says Leow.
As at 11.59am, shares in Wilmar are down 3 cents at $3.32 while shares in Bumitama Agri are trading flat at 68 cents.
