High operational costs coupled with suppressed profit margins on lower-than-expected production and sales volumes would weigh on the earnings of plantation companies this year.
BIMB Securities Research has made earnings downgrades on almost all companies under its coverage, considering the lower average selling prices of palm products, fresh fruit bunches (FFB), crude palm oil (CPO) production as well as downstream margins on lower sales volume and higher costs expected.
“For the first-quarter results season this year, out of nine stocks under our coverage, four companies came in within expectations with two above and three below expectations.
“Most of the companies reported lower year-on-year (y-o-y) or quarter-on-quarter production, ” it said.
However, the research house noted that there could be some margin improvement in the second half of the year (H2) earnings due to improvements in FFB production and the higher expected palm product prices achieved compared to last year.
“If production progresses well in H2, we expect the performance of pure plantation companies to be favourable, given current palm product prices trading above 2019’s average prices.
“Nonetheless, there might be a high possibility of a margin squeeze in downstream players, as demand and price concerns heighten, ” it said.
Meanwhile, BIMB Securities Research is keeping a neutral call on the plantation sector with an average CPO forecast of RM2,300 per tonne in 2020 from RM2,480 per tonne previously in May.
“Hence, we lower our CPO price assumption for companies under our coverage by 5%-7% from the earlier forecast of RM2,400 per tonne-RM2,480 per tonne to RM2,250-RM2,350 per tonne.
“As such, earnings growth is expected to average at around 5% y-o-y in 2020, ” it said.
BIMB Securities Research has reduced the sector’s net profit forecast for financial year 2020 (FY20) and FY21 by an average of 20% and 13% respectively due to its revised palm oil price, production and downstream margins on stronger-than-expected competition in value-added products.