PETALING JAYA: AmInvestment Bank, which is underweight on the plantation sector, believes that crude palm oil (CPO) prices would continue to be in the doldrums as industry palm production is expected to increase in the second half of 2019 (H2 19).
“We would turn positive on the plantation sector if there are disruptions to supply, which would result in lower palm stockpiles. We are now assuming an average CPO price of RM2,100 a tonne for Malaysia in 2019 versus our previous assumption of RM2,300 a tonne,“ the research house said.
Overall, upstream profits of the plantation companies under its coverage fell 20% to 60% year-on-year in Q1 19. Also, the decline in the core net profit of the integrated companies in Q1 19 was not as sharp as the pure players as downstream earnings helped mitigate the slide in CPO prices.
“The year-on-year fall in CPO prices in Q1 19 could not be compensated by the increase in fresh fruit bunch (FFB) production. Average CPO prices realised by the planters ranged from RM1,900 a tonne to RM2,000 a tonne in Q1 19. The CPO prices realised were 17% to 23% lower year-on-year in Q1 19.”
It said FFB production in Malaysia rose in Q1 19 in contrast to the weak growth in Indonesia. The companies in its stock universe recorded FFB output growth of 3.1% to 14.2% year-on-year in Q1 19.
“In Malaysia, we believe that the year-on-year increase in FFB or CPO production would continue in the coming months. FFB yields are expected to improve in Malaysia in H2 19 after being affected by the lagged impact of El Nino in 2018. In H2 18, industry CPO production in Malaysia slid 5.4% year-on-year.”
However, UOB Kay Hian maintained its market weight on the sector, maintaining its view that CPO prices in 2019 will be stronger on the back of lower production, strong demand for biodiesel, lower soybean crushing, and lower rapeseed and canola production. Its CPO price assumption for 2019 is RM2,350 a tonne.
The research house expects downstream to continue to perform well in Q2 19.
“Most of the companies achieved high downstream margins. With low feedstock prices, we reckon downstream operations of the companies would continue to benefit and perform well in Q2 19, in line with management guidance.”
It added that with the current implementation of B10 biodiesel blending for the transportation sector and stronger demand, biodiesel plants’ utilisation rate has also increased. Utilisation rates are expected to be higher with the implementation of B7 biodiesel blending for the industrial sector starting July.
“2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia.”