Positive Profit Indicators

The current steep CPO price trading above RM3,000 per tonne and the lower palm oil inventory are positive profit indicators for Malaysian oil palm plantation companies moving into the current year.

But analysts say that planters’ profit margins could be undermined by escalating production costs, particularly in fertilisers, due to the weakening Ringgit against the US Dollar, the full-year impact of minimum wage implementation and uncertain export markets outlook.

This year, established planters could stand to gain from the CPO average selling price of between RM2,500 and RM2,800 per tonne – albeit almost the same level as last year, according to analysts.

This is on the back of their efficient average cost of production between RM1,400-1,500 per tonne compared with less-efficient or new planters, whose cost of production could be as high as RM1,800 per tonne.

Among the plantation companies, a mere RM100 increase in the CPO price per tonne could translate into additional “hefty” contributions to group profits.

According to Maybank Kim Eng’s latest regional plantations report, companies that are most sensitive and leveraged to the CPO price movement with relatively higher cost of production per tonne include TH Plantations Bhd, Felda Global Ventures Holdings Bhd (FGV) and Boustead Plantations Bhd.

For every RM100 per tonne change in CPO prices, TH Plantations’ earnings sensitivity is the highest at about 28.8% followed by FGV at 28.6%, Boustead Plantations (21.8%) and Sarawak Oil Palms Bhd (14.2%), says the research unit.

Maybank Kim Eng points out that the earnings sensitivity to CPO price movement is mostly lower among big planters with diversified upstream and downstream businesses. IOI Corp Bhd earnings sensitivity is at 5.8%, Kuala Lumpur Kepong Bhd at 6.9%, Sime Darby Bhd at 7.4% and Ta Ann Holdings Bhd at 8.6%.

Sime Darby had said that every RM100 per tonne change in the CPO price could result in an “addition or reduction of about RM250 million” to its group profit while for FGV, it could result in an addition or reduction of about RM100 million.

Maybank Kim Eng also envisaged that large-cap plantations would continue to benefit from the changing investment landscape in Malaysia, where there has been a growing emphasis on Syariah-compliant stocks.

“And the Employees Provident Fund has joined the bandwagon as it launched a RM100 billion Syariah retirement savings fund for contributors effective this month as a start,” adds the research unit.