PETALING JAYA: The worst is over for the plantation sector as palm oil exports are expected to make a strong recovery this month, after a dismal fourth quarter last year (Q4 18) and a surprise spike in inventory last month.
Last month, palm oil inventories unexpectedly rose to 3.05 million tonnes (MT) as exports declined by 21.2% month-on-month, dragged by weaker demand from China while crude palm oil (CPO) price performance was under pressure due to concerns about oversupply.
“The palm oil industry has less than three months to pare down its inventory to an optimal level before the high production season kicks in. Nevertheless, we think demand will likely pick up this month after a long holiday break in China,” PublicInvest Research said in a report today.
It expects inventory to drop below 3 million MT this month, on the back of a strong recovery in exports. According to Intertek, Malaysian palm oil exports rose 10.7% year-on-year to 435,464 MT in the first 10 days of March.
In Q4 18, the sector experienced weaker CPO product prices amid record high inventory levels in the country and higher inventory levels carried over by plantation companies as selling prices were unattractive.
During the quarter, inefficient and small plantation companies were in the red as CPO prices fell below their break-even level. In addition, the sector saw higher cost of production due to a decline in palm kernel credit and higher fertiliser cost, caused by the weaker ringgit.
“Under our coverage universe, Q4 18 realised CPO average price was down to RM1,878 per MT versus MPOB’s RM1,920 per MT, pressured by the current high inventory levels and strengthening of the ringgit. FGV Holdings achieved the highest average CPO price for the quarter at RM2,053 per MT followed by IOI Corp’s RM1,932 per MT while TSH Resources’ RM1,780 per MT was the lowest,” said PublicInvest Research.
It maintained its “neutral” call on the plantation sector with a full-year average CPO price forecast of RM2,200 per MT. Ta Ann Holdings remains its top pick based on strong turnaround in the plywood segment and expected improvement in plantation, driven by a double-digit growth in fresh fruit bunches (FFB) production.
“CPO price futures have staged a strong rebound since hitting a two-year low of RM1,966 per MT last November, rising more than 9% to RM2,120 per MT. In general, most plantation companies foresee higher CPO price this year with a range of RM2,200 to RM2,500 per MT,” it added.
Meanwhile, Hong Leong Investment Bank (HLIB) Research cautioned that higher palm output may offset the improvement in exports, which may limit CPO price upside in the near-term.
“While exports will likely improve from March 2019 onwards (as palm oil exports typically improve when winter season nears end), this would likely be offset by seasonally higher palm output, resulting in gradual drawdown in palm inventory, hence capping near-term CPO price upside,” it said in its report.
It maintained its average CPO price assumptions of RM2,300 per MT for 2019 and RM2,400 per MT for 2020, and kept its “underweight” rating on the sector.
“We believe pricey valuations (following recent share price appreciation of most plantation companies) will cap near-medium term share price performances of plantation players,” it said.
