PETALING JAYA: Hong Leong Investment Bank (HLIB) Research expects plantation companies under its coverage to deliver quarter-on-quarter (q-o-q) earnings growth in their upcoming third quarter of financial year 2024 (3Q24) results.
This will be backed by seasonally stronger output and an improved oleochemical sub-segment, the research house said in its plantation sector’s 3Q24 results preview yesterday.
On q-o-q basis, seasonally stronger output season will likely lift planters’ 3Q24 upstream earnings.
“During the quarter, all planters under our coverage registered q-o-q fresh fruit bunch output increase of 4.3% to 26.5%.”
For the downstream segment, HLIB Research believes weak refining margins arising from export tax differentials between Malaysia and Indonesia, and overcapacity of the refining sub-segment in Indonesia will likely be partly mitigated by improved performance at the oleochemical sub-segment.
Meanwhile, planters under its coverage will likely post mixed performance on a year-on-year (y-o-y) basis.
The research house said planters with higher exposure in Malaysia, namely, FGV Holdings Bhd
, Hap Seng Plantations Holdings Bhd (HSP), IOI Corp Bhd and Johor Plantation Groups Bhd will likely register better upstream earnings than those with higher exposure in Indonesia.
“This is due to better palm productivity in Malaysia, arising from improved labour availability, while palm productivity in Indonesia will likely have weakened, mainly on the back of the carry over effect from El Nino at end-2023,” it added.
On the other hand, the downstream segment will likely improve on a y-o-y basis, mainly on the back of low base effect and improved demand from European customers.
HLIB Research has also raised its crude palm oil (CPO) price assumptions by RM150 per tonne to RM4,150 per tonne in 2024 and RM200 per tonne to RM4,000 per tonne in 2025, to reflect the recent uptrend in the CPO price.
The CPO price has surged by over 10% since early-October. This brings the year to date average to RM4,069 per tonne mainly due to concerns on weaker output from both Malaysia and Indonesia following seasonal cropping patterns and lagged impact from El Nino at end-2023.
In addition, the Indonesian government’s recent announcement to go ahead with its plan to raise its B40 biodiesel mandate by 5% from January 2025 onwards, will boost palm oil consumption and reduce palm oil stockpile in Indonesia and inventory replenishment by China.
“We believe this (CPO price) will remain at elevated levels possibly until 1Q25, supported by weak palm output and robust near term demand.
“Based on our estimates, every RM100 per tonne rise in our CPO price assumption will lift the earnings forecast for plantation stocks under our coverage by 3.5% to 15%,” the research house noted.
HLIB Research also said its earnings forecasts and target prices (TPs) of the plantation stocks under its coverage will only be adjusted in the upcoming results season. It has maintained a “neutral” call on the plantation sector for now.
For exposure, the research house said its top “buy” picks are IOI with a TP of RM4.22 and HSP at a TP of RM2.21.
