Regional palm oil plays struggle under cost pressures, price normalisation

IT HAS been annus horribilis for palm oil companies across South-east Asia, with nearly all of them reporting declines in revenues and earnings for the latest financial period.

This came on the back of a normalisation in crude palm oil (CPO) prices, as well as margin pressures due to higher costs and lower average selling prices (ASPs). 

A recent report from Fitch Solutions unit BMI noted that the year-to-date average for CPO prices stands at RM3,805.20 (S$1,110.33) per tonne, versus last year’s average of RM4,910. 

At current prices, the commodity has fallen about 6.7 per cent in the year to date, and 9.6 per cent on a year-on-year basis, analysts said. 

The fall in palm oil prices was reflected “accurately” in regional stocks’ performance, said Aletheia Capital analyst Nirgunan Tiruchelvam. 

“The fall in revenue is in line with the drop in CPO prices, so it’s not at all surprising,” he added. 

Among Singapore-listed palm oil companies, pure plays suffered the steepest net profit declines for the first half of the fiscal year. 

Indofood Agri Resources ’ net profit for H1 tumbled 64.8 per cent. Bumitama Agri and First Resources booked a 45.4 per cent and 44.1 per cent decline in earnings, respectively. Golden Agri-Resources posted a 53.2 per cent drop in earnings.

Wilmar International , which is usually more buffered against CPO price declines than other palm oil players due to its diversified portfolio of various agribusiness products, such as rice and sugar, recorded a 52.7 per cent decline in H1 profit.

This was largely due to the fall in commodity prices across the board. The group also suffered lower processing margins for its midstream and downstream operations. 

In Malaysia, companies that have reported their financial results for the latest fiscal quarter ended June also posted declines. Sarawak Plantation booked a 44.8 per cent decline in earnings. IOI Corp and Sime Darby Plantation’s profits fell 93 per cent and 53 per cent, respectively.

In Indonesia, the earnings of Sinar Mas Agro Resources and Technology and Salim Ivomas dropped the most. Dharma Satya Nusantara reported a 15.1 per cent uptick in revenue on the back of higher sales, but earnings fell 21.8 per cent due to higher expenses and costs of production.

Aletheia Capital’s Tiruchelvam noted that the average realised price for each plantation in the region varies. This depends on a company’s hedging strategy, how much of their palm oil they have sold forward, and how they have managed their revenues, he said.

He added that palm oil plantations should typically be generating about US$300 per tonne in earnings before interest, taxes, depreciation and amortisation. But many companies are not able to rake in such earnings due to higher costs of production, among other things. 

“There’s very little (palm oil companies) can do in this business, because it’s a commodity. They’re very much driven by palm oil prices,” he said.

In the region, he said, the palm oil stocks that have the “purest exposure” to the commodity’s prices are Indonesia-listed Astra Agro Lestari and Singapore’s Bumitama Agri. 

Other companies have a processing element in their operations, which makes their stocks less exposed to any volatility or fluctuations in CPO prices. 

Looking ahead, Tiruchelvam said he is “bullish” on the outlook for CPO prices and the demand for the commodity. He noted that the upcoming El Nino phenomenon will be a boost for the sector. 

He said palm oil productivity has typically fallen by two standard deviations in each of the four instances of El Nino over the past two decades.

While palm oil prices have already recovered from their lows in June this year, he believes El Nino could push up the commodity’s prices even more.

BMI analysts are expecting palm oil prices to average RM3,800 per tonne this year, with El Nino skewing any risks to the upside.

They noted that during the El Nino of 2014 to 2016, below-average moisture levels across Indonesia and Malaysia caused monthly palm oil prices to track upwards in Q4 2015. They peaked in Q4 2016, gaining about RM1,000 per tonne over the period.

“The current El Nino event poses a major upside risk to our average palm oil price outlook over the next 12 to 18 months. Much depends on the eventual strength of the El Nino event itself,” they said.