Plantation firms expected to deliver good financial results

PETALING JAYA: PublicInvest Research expects most of the plantation companies to deliver good set of results in the upcoming reporting season, riding on stronger CPO prices and recovery of fresh fruit bunches (FFB) production in Indonesia.

For Q4, average CPO prices stood at RM2,952 per tonne, a 36% year-on-year and 12.2% quarter-on-quarter growth.

Among the companies under coverage, the research house is of the view that Genting Plantations Bhd, Sime Darby Bhd and TSH Resources Bhd could potentially deliver earnings surprises as they should benefit from both production recovery in Indonesia as well as stronger CPO prices.

Kenanga Research suggested investors take profit on planters, in view of the likely strong end-Feb results season, as a CPO price correction is likely to happen in late Q1 to Q2 2017 on seasonal production uptick, thus maintaining a reasonable discount to soybean oil.

Despite that, the research house remains near-term “positive” and long-term “neutral” on the plantation sector, with an updated Q1 CPO trading range of RM2,850 to RM3,360 per tonne and unchanged FY17 CPO price of RM2,550 per tonne.It is of the view that CPO prices will continue to be supported by expectations of lower production in February.

Kenanga Research foresees exports to go lower in February in anticipation of tight supplies, high prices and less trading days, which could continue to dampen demand.

“Furthermore, compared with soybean oil, CPO is currently trading at a US$10 per tonne discount month-to-date, which is very unattractive against to the two-year average of US$100 per tonne. As a result, we expect exports to remain soft in February 2017, at -12% to 1.13 million tonnes,” it noted.

Exports in January were relatively flat at 1% month-on-month growth as improved China and global demand offset weaker Pakistan, European Union and India demand.

Kenanga Research foresees stocks for February 2017 to continue falling, by 8% to 1.42 million tonnes as demand outweighs supply, premised on both weaker exports on unattractive price and supply fundamentals, plus seasonally softer production.

While CPO production weakening for the fourth consecutive month in January, Kenanga Research believes it will bottom out in February with a 10% decline to 1.15 million tonnes, on the back of lower harvesting days and seasonal impact to further weaken production, in line with historical February production patterns.