By Sherilyn Goh
The upcoming results announcement for the third quarter of 2015 (3Q15) may see plantation companies posting lower earnings, weighed down by low crude palm oil (CPO) prices, below-potential production levels and foreign exchange losses incurred from a weaker performing ringgit, according to a UOB Kay Hian (UOBKH) report.
“Sector earnings should be lower year-on-year (y-o-y) as production in Malaysia increased only around 4% y-o-y in 3Q15 but prices were down 7% y-o-y. The worst-hit state was Sabah as its production for 3Q15 was also down marginally by 0.4% y-o-y,” it said.
The research house however noted that 3Q15 results should be better than that of 2Q15, as the 10.7% quarter-on-quarter (q-o-q) increase in output should more than offset the 6.7% q-o-q drop in average CPO price, while cost is expected to be lower q-o-q due to lower fertiliser cost.
UOBKH however does not see any impact on share prices, as the market is expected to be “forward looking” into potentially higher CPO prices in 2016, due to the possibility of lower production from Malaysia and Indonesia.
“Among Malaysian-listed companies, we see value in smaller upstream players such as
Kim Loong Resources and United Malacca still trading below the sector’s 21.8 times 2016F price-earnings and with decent dividend yields of 5% and 3% respectively,” it said.
According to UOBKH, refining margins in 3Q15 are expected to improve due to the fact that contraction in prices of refined products is not as sharp as CPO’s, refined prices are mainly quoted in US dollar and that those further downstream should be able to extract more value from the value chain.
Companies with integrated downstream exposure are Wilmar, IOI Corp, KL Kepong, First Resources, Golden Agri and Astra Agro Lestari.
UOBKH is maintaining its “market weight” call on the plantation sector.
“For a stronger CPO price recovery, we need to see more demand to take up volume from discretionary biodiesel demand and soybean supply needs to come off more.
“We prefer Indonesia-based plantation companies. Top picks are First Resources, Bumitama Agri, Wilmar International and Astra Agro Lestari,” it added.
The Malaysian Palm Oil Board will release the October production and export figures for the palm oil sector next week.
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