Indonesian plantation stocks to be hit by higher production costs in 2022: UOBKH

UOB Kay Hian (UOBKH) expects crude palm oil (CPO) weakness as the Indonesian plantation sector is hit by higher costs of production in 2022.

In a report on Wednesday (Nov 17), the brokerage maintained an "underweight" rating for the sector and raised CPO assumptions to RM3,800 (S$1,235.50) per tonne forecasted for 2022 and RM3,000 per tonne for 2023 respectively, up from RM2,800 per tonne and RM2,600 per tonne previously.

UOBKH has estimated production costs will continue to rise by at least 20 per cent for all plantation companies.

Based on industry guidance, the brokerage is expecting a further surge in fertiliser costs, which have risen by at least 50 to 80 per cent in the year to date due to supply disruptions, strong demand and higher input costs.

UOBKH analysts also noted that the earnings leverage to high CPO could be offset by weak production growth and high production costs. CPO prices could also weaken in the second quarter of 2022, in their view, as inventory for the sector is rebuilt and there is greater supply of oilseeds in the global market.

According to the analysts, Indonesia's total output for the first 9 months of the year came in slightly below market expectations due to dry impact from 2019 and poor weather conditions.

"We believe CPO prices may sustain at these levels in Q1 2022 due to the continued disappointing palm oil production in 2021, as yield recovery from the previous drought is taking longer than expected," they said.

The analysts have also identified theft of fresh fruit bunches (FFB) as a potential problem for the plantation industry, which may lead to the need for additional security costs, such as hiring security personnel or implementing electric fencing.

Citing information from a contact of UOBKH, they noted that FFB theft cases have been on the rise in estates as prices have hit a record high. They also reckon that FFB output for Q4 2021 is likely to be lower, quarter on quarter, due to weather variations in some areas within Kalimantan.

UOBKH has named Tunas Baru Lampung as its top industry "buy" pick among stocks under its coverage, as it believes the company will benefit from the recovery of healthy basic staples demand (such as cooking oil and sugar) and better margins from biodiesel and sugar refining.

It has identified Astra Agro Lestari as a "good short-term name" due to its earnings sensitivity to CPO prices - but only in the event that CPO prices continue to break record highs. The company has been rated "hold".

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