UOB Kay Hian has maintained its “market weight” recommendation on the Singapore plantation sector upon improved y-o-y earnings in 1H20, and expectations of a better 2H20.
UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yeow noted the reason behind most companies’ better 1H20 earnings was due to better selling prices despite lower sales volume and production.
This is except for Golden Agri Resources (GGR), which remained in net loss for 1H20 due to higher operating expense.
On production, most companies reported lower y-o-y fresh fruit bunch (FFB) production in 1H20, except for First Resources (FR) which reported a marginal increase of 0.3% y-o-y in 1H20. This is mainly due to the fact that FR’s estates are mainly in Riau region, where there was lower rainfall volume in 2Q20.
Production was also revised downward from end 2019, the market was expecting Indonesia production to increase by 1m tonnes and companies had guided for positive to flat y-o-y production growth for 2020.
However, 1H20 production was disappointing in Indonesia, mainly due to the unfavourable weather and low fertiliser application in 2019.
As such, companies have revised down their production growth guidance for 2020 to negative to flat y-o-y growth for 2020.
Leow and Yeow expect companies to continue to deliver better h-o-h earnings in 2H20, anchored by higher selling prices.
They added production in 2H20 could be marginally better than in 1H20, and said companies are guiding 1H:2H production ratio at 45:55.
Having said that, they also expect better h-o-h sales volume in 2H20, as there was some inventory build-up towards end-June 20, which will be delivered in 3Q20.
The analysts also believe that crude palm oil (CPO) prices may soften when CPO production starts to climb in late-Aug 20, with an expected peak in Sep-Oct 20. Furthermore, palm oil demand from China and India are expected to fall after their inventory replenishment.
Potential changes in the biodiesel market have also been identified as a factor that could affect this sector.
The Indonesian government might raise the palm oil export levy further from the current export levy of US$55 ($75.35) per tonne. Furthermore, the biodiesel conversion cost also was reduced from US$100 per tonne to US$80 per tonne in May, and this might be reviewed and revised by the Indonesia government again.
In light of this, Leow and Yeow said it may have an adverse impact on pure upstream players such as Bumitama, mainly because upstream players need to pay higher export duty which is used to fund the cost difference between biodiesel and diesel prices as an incentive for biodiesel producers.
Hence, integrated companies such as First Resources and Golden Agri Resources would see less impact on earnings as the higher cost on export duty would be partially mitigated by their biodiesel segment.
The analysts have put a “buy” call on First Resources with a target price of $1.65, while placing “hold” ratings on Bumitama Agri and Golden Agri-Res with TPs of 52 cents and 14 cents respectively.
As at 1.22pm, shares in First Resources were trading at $1.31, Bumitama Agri at 52 cents, and Golden Agri at 14.5 cents.
