Plantation stocks to post lower 2Q revenues

by **Cals** Wed 14 Aug 2013, 09:48

Plantation stocks to post lower 2Q revenues
Business & Markets 2013
Written by Maybank IB Research
Wednesday, 14 August 2013 09:02

[b style="line-height: 17.99715805053711px;"]Malaysian PLANTATION []s[/b]
Maintain neutral: In the upcoming results season, we expect most upstream plantation stocks to post flattish to weaker quarter-on-quarter (q-o-q) profits on lower sales volume and higher plantation costs while the spot crude palm oil (CPO) price was flattish q-o-q.

Refining margin is expected to be lower q-o-q due to the low crop season while margins for oleochemicals and speciality fats players are likely to stay healthy. Coupled with a persistently low CPO price, the sector is likely to underperform in the third quarter of 2013 (3Q13). The sector is "neutral" on 12-month view. "Buys" in the region are TA ANN HOLDINGS BHD [], First Resources Ltd, Bumitama Agri Ltd, Wilmar International and PT Astra Agro Lestari. "Sells" are TH PLANTATIONS BHD [] and KUALA LUMPUR KEPONG BHD [] (KLK).

Sales volume in 2Q is expected to be weaker q-o-q as 1Q sales benefited from brought forward palm oil stocks (2.63 million tonnes as at Dec 31, 2012) as the industry experienced a bumper harvest in 4Q12. As for fresh fruit bunch (FFB) production, about 56% of the stocks under our coverage reported a decline in quarterly production in 2Q13 while about 33% reported growth.

A decline in production translates into lower sales volume. Decliners were Genting Plantations Bhd (14.7% q-o-q), KLK (13%), IOI Corp Bhd (11.1%), SIME DARBY BHD [] (9.3%) and TSH Resourses Bhd (5.7%). Gainers were led by SARAWAK OIL PALMS BHD [] (10.4%
q-o-q), TH Plantations (9.3%) and Ta Ann (4.7%). Given Felda Global Ventures Holdings Bhd's relatively old oil palm tree profile, it posted flattish quarterly production.

On a year-on-year (y-o-y) comparison, all plantation stocks except Sime Darby posted higher production as the industry was generally affected by tree stress in 2Q12.

Spot CPO average selling price in Malaysia has been flattish q-o-q at RM2,324 per tonne (-27.8% y-o-y) in 2Q13. Combined with a lower quarterly sales volume, we expect plantation stocks to generally post lower quarterly revenues in 2Q.

Manuring typically picks up during the relatively dryer months to minimise wastage and maximise absorption of the necessary nutrients. Traditionally, such activities are carried out in the first half (1H) of the calendar year as 2H is relatively wetter in Malaysia. Manuring in 2Q13 may have picked up given the relatively dry weather experienced during the quarter. Fertiliser costs, when incurred, are expensed out leading to higher plantation costs in 2Q.

We expect Malaysian refiners' to suffer sequential quarterly decline in refining margins. Refiners in Peninsular Malaysia should experience razor thin to negative margins in 2Q, largely seasonal in nature due to the low crop season as evidenced by the low refinery utilisation rates which averaged 68.5% in 2Q13 (+0.8 percentage points [pps] q-o-q, +8.4 ppts y-o-y).

Nonetheless, Sabah and Sarawak refiners should do better as they continue to enjoy RM80 to RM100 price discounts, albeit lower compared with a quarter ago.

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As for oleochemical and speciality fats players, we anticipate healthy margins to continue as feedstock prices are stable. Utilisation rates of oleochemical players were high at 78.6% on average in 2Q (+8.3 pps q-o-q, +9.1 pps y-o-y). — Maybank IB Research, Aug 13

This article first appeared in The Edge Financial Daily, on August 14, 2013.