Better 2H16 earnings expected for planters

PETALING JAYA: The plantations sector is expected to see stronger earnings in the second half of the year (2H16) on output recovery, according to MaybankIB Research.
With the exception of Felda Global Ventures Holdings Bhd (FGV), which posted a core net loss of RM75 million in 1H16, the other planters' (those with December financial year end) core earnings met 28%-59% of the research house's full-year core net profit forecasts.
"We expect 2H16 earnings outlook to be significantly better largely on seasonally higher FFB (fresh fruit bunch) output while CPO (crude palm oil) ASP (average selling price) remains stable. Most companies (those with December FYE) had a dismal 1H16 output and following revisions to our FFB output assumptions (on fresh guidance by management), they represent 38-43% of our full-year assumptions. This implies that 2H16 output will grow 50% (from 1H16). Meanwhile, the recent rally in palm kernel (by-product) prices will also lift overall margins in 2H16," said MaybankIB in a report.
It said the low output was the key reason for the weak 2Q16 results, which were mixed. Out of the 10 stocks under MaybankIB's coverage, 30% was above expectations, 40% fell short, and 30% in line with expectations.
Overall 1H16 FFB output was weak.
"We expect earnings to play catch up in 2H16 with 50% (from 1H16) output growth, supported by stable CPO ASP, and high palm kernel prices. However, at 28 times the 2016 and 24 times the 2017 price-to-earnings ratio, we believe the Malaysian planters have largely priced in the earnings recovery. We prefer Singapore and Indonesia listed planters for their cheaper valuations," said MaybankIB.
It is staying neutral on the sector as it does not anticipate the present high spot CPO price of RM2,800 per tonne to be sustainable going into the peak production months of September-November 2016.
In fact, it said the three months CPO futures of RM2,644 per tonne is at a RM246 per tonne discount to the one month CPO futures as the market factors in output recovery in the coming months.