KUALA LUMPUR: Maybank Investment Bank (Maybank IB) expects oil palm planters to report flattish-to-lower third quarter 2019 earnings as output recovery is offset by lower palm oil prices.
However, selected Sarawak-based planters such as Ta Ann Holdings Bhd and Sarawak Oil Palms Bhd are likely to report better quarter-on-quarter core earnings on stronger output, the bank-backed research firm noted in a recent report.
"Integrated players will fare relatively better, benefiting from low feedstock costs,” said Maybank IB.
Investors should look forward to earnings recovery in 2020. Valuations of small-mid caps are low on an enterprise value/planted ha basis and present an accumulation opportunity.
Maybank IB maintained a ‘Neutral’ call on the sector buy recommended ‘Buy’ calls on Ta Ann and Sarawak Oil Palms.
Further, it noted that against 3Q19’s still low spot price of RM2,018 per tonne, companies with relatively higher cost of production such as TH Plantations Bhd and Boustead Plantations Bhd will likely remain in the red.
"However, we think investors should look to a stronger palm oil price recovery in 2020 based on anticipated tightening of palm oil supply in 2020-21 on biological tree stress and slower growth in mature oil palm area," said Maybank IB.
This is due to lack of significant growth in new oil palm plantings across Indonesia and Malaysia, since 2015.
"Our average palm oil selling price forecast for 2020 is RM2,300 per tonne while for 2019, it is RM2,100 per tonne," it said.
Further, Maybank IB said thanks to the zero CPO export duty in 3Q19 for Malaysia and Indonesia, the Malaysian refiners continued to enjoy a level-playing field vis-à-vis Indonesian refiners.
The utilisation rate of palm oil refining capacity
rose to its highest level since 2011 at 75 per cent (2Q19: 71%, 3Q18: 70%) in 3Q19.
"With rising palm oil price trend in 3Q19, we expect refiners to enjoy mark-to-market inventory gains, which in turn will help lift overall refining margins.
"Likewise, we also expect the oleochemical players such as IOI Corp Bhd and Kuala Lumpur Kepong Bhd to enjoy another quarter of decent margins evidenced by the high average industry plant utilisation rate of 105 per cent (2Q19: 94%, 3Q18: 102%).
Oleochemical players are likely to continue to benefit from the relatively cheap feedstock costs, said Maybank IB.