KUALA LUMPUR: Plantation companies are expected to see steady performance for the second half of 2024 amid stable crude palm oil (CPO) prices through the year.
According to MIDF Research, the CPO price is expected to average at RM3,800 per tonne.
Reiterating its “neutral” stance, the brokerage noted that despite the stable CPO price projection, the plantation sector continued to face some downside risks.
These include the domestic sales obligations in Indonesia, the appreciation of the ringgit, which will reduce the price competitiveness of CPO against other vegetable oils, high cost of production and the implementation of the European Union Deforestation Regulation, which will slow the CPO and processed palm oil trade due rigid environmental policy.
MIDF Research raised its sector profit forecasts by 3% for 2024 and 2025, and 2% for 2026, citing higher earnings revisions for Kuala Lumpur Kepong Bhd
and SD Guthrie Bhd, in particular.
This came after considering revision of its new average CPO price expectation to RM3,800 per tonne from RM3,600 per tonne as well improvement in fresh fruit bunch (FFB) production and yield on Indonesia.
According to MIDF Research, the recently concluded earnings season saw mixed financial performances by plantation companies.Of the nine plantation companies under its coverage, only three exceeded performance expectations, five met forecasts and one fell short, the brokerage noted.
Overall, the sector’s improved in earnings for the second quarter of 2024 (2Q24) were driven by decent crop yields and elevated average CPO prices, which hovered around RM3,834 to RM4,129 per tonne.
MIDF Research noted that in 2Q24, the average selling price (ASP) of CPO strengthened to RM4,038 per tonne, representing an increase of 5% year-on-year.
The brokerage said PPB Group Bhd was the only one of the companies that produced results falling short of its expectations.
“The variation was mostly caused to the weakness of its core business namely consumer products, film exhibition and the Wilmar International Ltd contribution,” MIDF Research noted.
Meanwhile, it said demand for oleochemical, biodiesel, and oil and fats products has rebounded significantly, leading to a notable turnaround in operational profits for biodiesel and oleo and fats refineries.
“Many refineries are now benefiting from expanded margins, with improvements seen in both oleo sales and profits. In Europe, oleo has experienced a strong recovery, driven by increased demand and better margins, despite continuing high utility costs,” MIDF Research said.
“However, the Chinese market remains relatively weak, with sluggish demand and ongoing uncertainties affecting derivatives products,” it added.
Within the sector, MIDF Research’s top picks are IOI Corp Bhd and Ta Ann Holdings Bhd.
“IOI outlook maintains steadfast and is well supported by both upstream and downstream profitability. Its refinery and oleo plant are well insulated from high input costs due to their strategic locations they operated in, unlike its peers that were operating in Europe, that mostly are impacted by high production costs - high natural gas,” the brokerage explained.
“Ta Ann is purely an upstream player, and the share price is highly connected with CPO movement, hence any upward trajectory in CPO prices would provide trading opportunity in the stock,” it added.
