By Lawrence Yong
Only two companies stand out in the Malaysian plantation sector – IJM Plantations (IJMP) and IOI Corp. – for reporting stronger net profits in 1Q13 as weak palm oil prices dragged others lower, analysts said.
The business prospects for the rest of the year is not much better. Although crude palm oil (CPO) prices are largely expected to inch up on seasonal demand, supply would also be ample. Analysts have rated the sector as ‘underweight’ to ‘neutral’.
IJMP’s results were above expectations on the lower-than-expected cost of production due to a delay in fertiliser application in the Sabah estates while IOI was aided by better downstream operations and revaluation gains from its property and investment properties division, the latest sectoral survey from UOBKayHian on plantations noted.
Other plantation companies tracked by analysts such as Genting Plantation, Kuala Lumpur Kepong Bhd (KLK), SimeDarby and Felda Global Ventures Holdings (FGVH) saw their quarterly profits slide. FGV Holdings saw the largest decline, with earnings down 28.9% from the same period a year before.
From the companies covered, the research house picked only IOI Corp, which is backed by a strong property division, as a recommended buy to investors.
“Going forward, we are expecting weaker year-on-year (y-o-y) results in 2Q13 because we expect CPO production to rise gradually as we enter the high production season in 2H13 but it is likely to remain capped by the low CPO prices,” UOBKayHian noted.
Alliance Research were slightly more positive. The research house upgraded its rating on the sector this week, from underweight to neutral. Alliance said they expected the festive season to help bring CPO prices higher in the second half of the year to around RM2,600/tonne. This would bring the whole year’s average to RM2,480/tonne, compared with Jan-May average price of RM2,312/tonne.
“As such, we upgrade the plantation sector to ‘neutral’ from ‘underweight,’ with IJM plantations as our top pick,” Alliance said.
Alliance noted that despite the seasonal downtrend in production in the five months leading up to February, cumulative production for the first four months of 2013 was 12.8% higher y-o-y.
But with the month of Ramadan commencing in July, Alliance said they expect some festive season pre-stocking to occur from June. Besides higher demand in Malaysia and Indonesia, exports to India and Pakistan also typically pick up during this period.
Alliance said that it has made IJM Plantations its top stock pick for the sector because new palm oil maturities were picking up pace in Indonesia, where they forecast a four-year earnings per share compounded annual growth rate of 25% going forward.
The bank-backed research recommended investors sell FGVH, which they said would continue to see negative earnings going forward because of their heavy replanting programme.
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