MARGINS IMPROVEMENT: Lower costs, effective tax rates offsetting weather issues
ANALYSTS said the latest quarterly results for plantation companies were largely above expectations, seeing better quarters ahead on the back of rising crude palm oil (CPO) prices and lower production costs.
RHB Research maintains its "overweight" stance on the plantation sector, given that six out of 11 companies under its coverage reported above-estimate results, while four booked numbers that were in line and only one had below forecasts results.
RHB said it believed the palm oil sector is in the early stage of a bull market, as funds have just started to flow in and valuations remain inexpensive.
Its top picks in Malaysia include IOI Corporation Bhd, Sarawak Oil Palms Bhd and Jaya Tiasa.
The six that reported above estimate results were IJM Plantations Bhd, Felda Global Ventures Holding Bhd (FGV), TH Plantations Bhd (THP), Genting Plantations Bhd (GENP), CB Industrial Product Holding Bhd and TSH Resources Bhd.
The four with results in line with forecasts are Kuala Lumpur Kepong Bhd (KLK), Sime Darby Bhd, IOI Corp and TDM Bhd while Sarawak Oil Palms performed below expectations.
According to RHB, while fresh fruit bunches (FFB) production of most companies was below expectation on extreme weather issues, this was offset by lower production costs and effective tax rates due to deferred tax writebacks.
It said most companies acknowledged that their Malaysian and Indonesian estates saw dry weather in the fourth quarter of the current year (2014) and that this weather is still prevalent, resulting in a reduction in their production forecasts/targets for the year.
"However, as a result of lower fertiliser costs, most companies reported lower CPO production costs during the quarter.
"For companies with downstream operations like IOI Corp, Sime, KLK and FGV, most reported margins improvement and profitability on the back of higher sales volume," it added.
Industry experts anticipate that should the dry weather continue for the next two weeks, production for the second half of the year will also be affected.
The research house said its 2014 CPO price forecast is RM2,700 a tonne and for 2015 it is RM2,900 a tonne.
"Our price projections imply that CPO prices will remain at current levels for the rest of second quarter 2014 on lacklustre production in Indonesia. This is due to the rainfall deficit over the past two years, before falling slightly in second half of the current year, as a result of the peak production period," it said.
RHB said most plantation companies reported lower CPO production costs during the quarter, due to cheaper fertiliser costs, which is estimated to have fallen by 21.7 per cent since December 2012.
"Going forward, however, we believe margins for downstream operations could narrow, as feedstock CPO prices continue on its uptrend, which will lead to higher margins on the upstream division instead," it noted.
Read more: RHB maintains 'overweight' call on plantation sector - Nation - New Straits Times http://www.nst.com.my/business/nation/rhb-maintains-overweight-call-on-plantation-sector-1.513409#ixzz32SZCdxP2
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