HLIB research maintains neutral stance on plantation sector as quarterly results dissappoint

KUALA LUMPUR: Hong Leong Investment Bank (HLIB)  research has maintained its RM4,000 per metric tonne estimates for crude palm oil for 2024 and a neutral stance on the sector, following a mixed bag of results in the just-ended quarterly reporting season.

Three-out of seven companies under its coverage posted weaker-than-expected results mainly from lower-than-expected fresh fruit bunches production (FFB and weaker-than-expected manufacturing performance.

The three companies were FGV Holdings Bhd (FGV), Hap Sep Plantations Holdings Bhd (Hap Seng) and IOI Corp Bhd (IOI).

The firm said its CPO estimates are based on El-Nino's impact on palm production and prices kicking in mid-2024.

Year-to-date, CPO price averaged at RM3,845 per metric tonne.

HLIB's top picks are IOI - Buy with a target price (TP) of RM4.66 and HSP Bhd - Buy with a TP of RM2.06.-

During the quarter, most planters saw year-over-year (YoY) FFB output increase in third quarter of calendar year 2024 (3QCY24), with the exception of FGV and TSH Resources Bhd (TSH)  on the back of improved FFB yield as workforce in Malaysia operations started normalising.

The YoY decline in FGV's FFB output was due to lagged impact from lower fertiliser application over the past few years and labour shortage, while the decline in TSH's FFB output was due largely to lower planted landbank following its land disposal in North Kalimantan, Indonesia.  All players registered QoQ improvement in their earnings, driven mainly by seasonally higher cropping pattern evidenced by a 12-63 per cent QoQ increase in their respective FFB output during the quarter. On the other hand, earnings performance at downstream segment, improved broadly on the back of improved refining margin but partly weighed down by persistently weak performance at oleochemical sub-segment.

Moving forward, most planters shared that monthly FFB production should likely have peaked in October 2023, and the current El Nino phenomenon will likely have minimal impact on FFB output in 2024, said HLIB.

It also added that most plantation companies expect crude palm oil (CPO) production cost to trend down further in 2024, on the back of higher productivity and lower fertiliser prices.

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