PETALING JAYA: The plantation sector’s fresh fruit bunch (FFB) output for the January to March period is the best first quarter (1Q) in terms of production since 2019, says Kenanga Research.
Harvests in 2023 could be on the mend after two years of subdued output, it added.
In a note to clients, Kenanga Research said early 2023 fruit production reports from plantation groups and the Malaysian Palm Oil Board (MPOB) also suggested that production is recovering even if the year-on-year (y-o-y) uptick in FFB may be modest.
Furthermore, two-thirds of the companies under its coverage reported higher y-o-y fruit harvests for 1Q of this year and all, except for Sime Darby Plantation Bhd
had reported better crude palm oil (CPO) production.
The quarter-on-quarter (q-o-q) weakness for both FFB and CPO output is seasonal as production typically peaks in the third quarter to bottom out in the first quarter, added the research house.
The MPOB’s 1Q23 output of 3.9 million tonnes of CPO is also just a shade under Malaysia’s 10-year average of CPO production of four million tonnes for the first quarter.
According to Kenanga Research, cost increments in the sector may also be stabilising.
“After labour and depreciation, fertiliser is the third highest cost component in CPO production.
“Since January 2023, prices of fertiliser have fallen sharply,” it pointed out.
Using the International Monetary Fund fertiliser index as a guide, it has fallen 29% in just two months – from 268.9 in January to 190.6 by March.
The March 2023 index of 190.6 is also below the 260 to 350 range during 2022 and is just 6% above
the 2021 full-year average, essentially hovering at levels before the Russia-Ukraine conflict.
“However, planters often buy fertiliser in advance, so the full benefit of lower fertiliser cost will be felt more in the latter half of this calendar year.
“Coupled with improving harvests, production costs should be toppish or at least approaching some stability, averaging RM2,000 to RM2,500 per tonne of CPO for 2023,” said Kenanga Research.
On CPO prices, the research house said the average price of RM3,800 per tonne is expected for 2023.
It noted the prospects of improving edible oil supply this year is intact despite poor ongoing soybean harvest in Argentina, which is offsetting record harvest in Brazil.
However, 2023 demand for edible oil is recovering rather strongly due to replenishment of inventories by buyers as prices are now more affordable compared with a year ago, China’s recent post-Covid reopening and biodiesel demand, notably from the United States, Indonesia and Brazil, the research house said.
“Since both supply and demand are recovering almost in tandem, the overall supply-demand balance is likely to stay fragile, hence range bound CPO prices averaging at RM3,800 per tonne for 2023 going into 2024,” it added.
Meanwhile, Kenanga Research said 1Q 2023 FFB production variance for individual plantation groups is mostly within the 5% range.
“The notable outliers are Hap Seng Plantations Holdings Bhd, Kuala Lumpur Kepong Bhd and United Malacca Bhd, whereby all three planters did better than 5% y-o-y rather than worse.”
However, the research noted its core earnings per share (CEPS) for Hap Seng Plantations and KLK have already imputed 9% and 7% y-o-y improvement respectively in FFB.
United Malacca’s strong performance meanwhile was partly reflected in its 3Q23 results, which spanned November 2022 to January 2023.
“Therefore, we are keeping our earnings forecasts and recommendations for the sector intact except for two groups,” said Kenanga Research.
FGV Holdings Bhd (FGV), instead of higher y-o-y production, reported a decline of 1% y-o-y 1Q23 FFB output.
This had led the research house to downgrade its forecast FY23 CEPS of FGV by 10%.
However, it kept a market perform call on the stock with a target price (TP) of RM1.40 based on its listing status uncertainty.
Kenanga Research also said its estimated PPB Bhd’s CEPS FY23 is toned down by 11% on weaker-than-expected 1Q23 results from its associate, Wilmar International Ltd.
“However, we are maintaining our outperform and TP of RM19.30 as PPB’s own results are due soon, forecast FY24 earnings are starting to influence valuations. We expect FY24 earnings to recover y-o-y,” it said.
Although volatile commodity prices can cause PPB’s earnings to swing q-o-q, the group’s exposure to the growing food and consumer sectors in Asia is attractive in the long term, said the research house.
