SINGAPORE (Mar 7): UOB Kay Hian is maintaining its “market weight” rating on Singapore plantation stocks.
In a Wednesday report, analyst Leow Huey Chuen says that with the exception of Golden Agri-Resources, the others under the research house’s coverage – Bumitama Agri (BAL), First Resources (FR) and Wilmar International – performed within expectations in 4Q17 and saw significant improvement on the back of higher fresh fruit bunches (FFB) production and better crude palm oil (CPO) average selling prices (ASP).
The research house is rating both FR and Golden Agri “hold” as it reckons that the higher production and earnings expected for 2H17 are priced in, while Wilmar and BAL have been rated “buy”.
Golden Agri recorded a loss in 4Q17 of US$29.1 million ($38.3 million), compared to earnings of US$46.3 million in 4Q16. This was mainly due to weaker-than-expected contribution from its palm & lauric and oilseeds segments
See: Golden Agri sinks into the red with 4Q loss of US$29.1 mil
Meanwhile, BAL reported earnings 4Q17 earnings of $35 million, the highest earnings improvement q-o-q despite weaker FFB production, largely attributed to lower operating costs as most of its fertiliser costs were booked in 9M17.
See: Bumitama Agri reports 21.2% drop in 4Q earnings to $35 mil
Only FR saw a q-o-q increase in FFB production during the quarter, while all the other companies within coverage saw a decline.
This is because most of FR’s estates are located in Sumatera, where the lagged impact from the drought ended earlier compared to Kalimantan.
Those with majority of estates in Kalimantan, such as BAL and Dharma Satya Nusantara (DSNG), showed q-o-q declines in FFB production in 4Q17 due to the lingering effect from the drought.
“The companies under our coverage guided FFB production growth of 8-20% y-o-y for 2018,” says Leow.
Golden Agri guided the lowest FFB production growth due to its old tree age profile with declining FFB yield, while BAL guided the highest FFB production growth of 15-20% on the back of FFB yield recovery and supported by contribution from new mature areas.
Wilmar and FR expect FFB production growth of 10- 12% and 10-15% respectively as the improvement from FFB yield will be partly offset by replanting activity.
In addition, the analyst expects oil extraction rate (OER) to improve in 2018. In 1H17, the companies experienced weaker OER due to high rainfall leading to high water content in the fruit and partly affected by lagged impact from the drought.
Meanwhile, there may potentially be higher biodiesel volume to be awarded this year.
“From our channel checks, we gather that the biodiesel volume to be awarded in Apr 18 is likely to be higher than in previous contracts,” says Leow.
This is partly due to the recent strengthening in crude oil prices and the weakening of CPO prices, which caused CPO premium against Brent crude oil to narrow, making the biodiesel programme more financially viable.
Moreover, ample soybean supply is likely to pressure soybean prices, in turn capping palm oil prices.
All the companies under coverage, except BAL have guided replanting targets for 2018. Although this will dilute FFB yield growth in the next 3-4 years, it will ensure sustainable FFB production growth in the longer term.
Global palm oil production is also expected to increase 5.2% to 70 million tonnes, which will help maintain refinery utilisation rate and in turn improve downstream utilisation and profitability in 2018 for Wilmar, Golden Agri and FR.
As at 3.40pm, shares in BAL are trading at 70 cents; FR at $1.74; Wilmar at $3.17; and Golden Agri at 36 cents.
