Analysts at RHB Bank Singapore and Maybank Securities are keeping their “neutral” rating on the plantation sector, expecting earnings to decline further q-o-q and y-o-y in 2QFY2023.
In their June 13 report, RHB analysts Hoe Lee Leng and Syahril Hanafiah note that 1QFY2023 reporting season for the sector saw disappointing earnings. Four planters booked below-expectations numbers, two posted in-line results, while only one came in above forecasts. The disappointing results were mainly due to higher-than-expected unit costs and lower-than-expected palm kernel prices.
That said, earnings should be lifted in 2HFY2023 as productivity improves and costs moderate, the analysts highlight.
Maybank analyst Ong Chee Ting points out that the market is anticipating crude palm oil (CPO) production prospects to further improve in the coming months as the industry enters into its seasonal peak output in the second half of the year. He adds that Malaysia’s production recovery for the rest of 2023 is also widely anticipated in part, aided by the recent influx of guest workers.
However, Ong highlights concerns on the present soft demand for palm oil as CPO price continues to trade at narrow discounts to competing major vegetable oils and gas oil relative to historical averages. Additionally, the fragile global macroeconomic outlook is seen as a headwind for CPO price in the immediate term.
Meanwhile, on the weather front, Ong notes that the US National Oceanic and Atmospheric Administration had declared the arrival of El Niño on June 8. An El Niño occurrence will likely infuse greater market price volatility on the agricultural commodity market, adds Ong.
“While an El Niño is generally positive for CPO price over a 24-month period, it is not a linear uptrend as other factors can influence prices too. Furthermore, based on our study of past 5 El Niños, there was no clear trend on fresh fruit bunches yield impact during periods of weak to moderate El Niños except during the strong El Niños.
“Even during periods of strong El Ninos, there were lagged impacts on output. Hence, the impact of an El Nino on production, if any, may only be felt in 2024,” says Ong.
RHB analysts echo Ong, adding that their checks indicate that planters are not seeing any tree stress currently. They cite good rainfall thus far, despite temperatures being higher during the current heat wave.
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“Expectations are still high for 2HFY2023’s output based on black bunch counts and improved labour force. However, depending on the severity of the El Niño there could be an impact on 2024 output,” they add.
