This is because individual firms still have steady operating cash flows which are adequate to part-finance projected increases in expansionary capex and maintain low-to-moderate financial leverage.
Malaysia and Indonesia continue to dominate the industry, and meet as much as 40% and 49%, respectively, of global demand. The bulk of production is for exports to key markets such as China, India and the EU.
The main pressure on the industry has been the 14% decline in the global CPO price in 2013, to USD857/tonne. However, marginally higher export volumes have offset the lower prices and resulted in marginally-lower-to-flat revenues at most rated companies.
Employee cost pressures have also buffeted the industry. This is because Malaysia imposed a statutory minimum wage - in the peninsular heartland, accounting for 54% of total CPO production - which we estimate has raised overall operating costs by around 13% yoy. Meanwhile, Indonesia raised its minimum wage by 40%, which pushed up the fixed costs of its relatively labour-intensive production base.
We expect operating profit to be maintained at the same level as last year. Modest revenue growth of around 5% yoy in Malaysia and 10% in Indonesia should remain underpinned by steady CPO prices - which we estimate will remain range-bound between US$800-900 per tonne - and modest increases in export volumes. This is because of reasonably healthy global demand; and falling inventory levels.
The rise in the statutory CPO content in bio-diesel will also help stabilise demand. Malaysia increased the CPO content in bio-diesel to 7% from 5% with effect from Jan 1 2014, while Indonesia raised it to 10% from 7.5%.
Moreover, Malaysian exports of bio-diesel input also rose in 2013, by over 5 times, although alternative fuel exports are only 1% of total CPO exports. The increased palm oil content in bio-diesel, and the rising trend in Malaysian bio-diesel exports, are secondary factors supporting the stable outlook for CPO demand in 2014.
Higher productivity should also support the profit of Indonesian companies. These producers continue to increase new planting, mechanisation and downstream activity. This would result in the Indonesian companies' FFO-adjusted net leverage stabilising at a maximum of 3 times in the medium term.
Malaysia's downstream CPO operations are in a mature phase. Fitch expects the 2014 palm oil-related capex to be in line with 2012 and 2013. Hence, financial leverage in the next 18 to 24 months is likely to remain low, in line with 2013 (The following statement was released by the rating agency). - Reuters
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