Flagging demand and forced labour issues are weighing on plantation stocks, say analysts, with Malaysian and Indonesian planters moderating production output.
In a Sept 13 note, RHB Group Research analyst Hoe Lee Leng is remaining “underweight” on the plantation sector, with a “neutral” recommendation on eight out of 13 stocks covered.
“Malaysia’s crude palm oil (CPO) output rose 11.8% m-o-m in August, while stocks rose 25.3% to 1.87 million tonnes, bringing stock/usage ratio back to historical mean levels. With peak CPO crop and US soy crop coming out in 4Q2021, we continue to expect a moderation of prices in the medium term. The ESG discount, which is holding back share price performance, is also expected to remain prevalent,” writes Hoe.
August production was led by West Malaysia (+10.7%), Sabah (+12.3%), and Sarawak (+14.3%). Production should continue to rise as we are in the peak season, notes Hoe.
Aside, Indonesia’s output from January to June was up 15.6% y-o-y.
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Conversely, exports fell 17.1% m-o-m in August, down 26.5% y-o-y, reflecting cautiousness on high prices, says Hoe.
Major m-o-m cuts came from the EU (-49.3% m-o-m) and China (-17% m-o-m), slightly offset by the increase from India (+29.6% m-o-m).
“In 2Q2021, we saw a mix of results regionally, with six in line, five above and two below,” says Hoe.
In Malaysia, output fell 9.3% y-o-y in 2Q2021, as labour shortage affected logistics and harvesting activities. While labour shortage remains prevalent, most companies expect a seasonal pickup in output to start coming through from late-3Q2021, says Hoe.
In Indonesia, Hoe notes a “marked jump” in 2Q2021 output from the companies covered, with an average 12% y-o-y rise in output, although the Indonesian Palm Oil Association’s (GAPKI) official 2Q2021 output was a stronger 19.8% rise. “This growth is likely to taper down in 2H2021, as some planters are expecting output in 2021 to be more evenly spread out between 1H2021 and 2H2021, at 50%:50%, instead of the normal 45%:55%.”
Most Malaysian planters are expecting production output to be flat or at a slight decline for 2021, says Hoe, while most Indonesian planters have raised their 2021F fresh fruit bunches (FFB) growth to a high single-digit to low double-digit.
“We believe ESG will remain a dampener on valuations for the medium term, at least until some of the big-cap players are able to work through their forced labour issues. We prefer Malaysian-centric names, as well as companies with downstream exposure in Indonesia that will be able to benefit from the current tax structure,” says Hoe.
Meanwhile, UOB Kay Hian Research analysts Leow Huey Chuen and Jacquelyn Yow think Indonesia’s high production growth is over, and demand is “not great”.
In a Sept 13 note, Leow and Yow are also maintaining “underweight” on the plantation sector.
UOB Kay Hian cites Pak Togar Sitanggang from the Indonesia Palm Oil Association (GAPKI), who revised his production forecast downwards due to the impact of the dry weather in 2019 and short-term labour efficiency.
“CPO prices may remain elevated in the short to medium term in view of lower production in 2H2021 and biodiesel consumption possibly remaining intact despite being weaker than the initial target. The production growth in October and November is crucial; if the production starts to peak, this would continue in 2022,” write Leow and Yow.
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Leow and Yow also note that there are rumours of an export levy revision once again. “Pak Togar mentioned that both parties are not wrong, [highlighting] that the biodiesel fund is still sufficient up to early 2022, based on the current palm oil- gasoil (PO-GO) spread that is below Rp4,000/litre.”
“However, PO-GO spread has widened to Rp5,000/litre currently and if this continues for the next three months, the government may need to relook into the export levy structure again,” adds Pak Togar.
As the earnings leverage to high CPO price is likely to be offset by weak production growth and rising cost of production, CPO price is expected to be lower in 2022 vs 2021 as global supplies recover and as ESG concerns lead to lower fund interest for the sector, write Leow and Yow.
Photo: Bloomberg
