Palm oil stocks book strong performance but face volatility, demand destruction ahead

Singapore

CRUDE palm oil (CPO) companies in the region booked a solid set of financials in the most recent reporting period, as palm oil prices soared on the back of tight supply and bad weather, as well as a spike in crude oil prices due to geopolitical tensions.

The outlook for 2022 remains optimistic. Palm oil futures are up about 43 per cent year to date, having touched a historic high of RM8,163 (S$2,622) per tonne on Mar 1. But the recent decline also reflects expectations of increased supply as well as concern that global growth might be derailed by inflation and geopolitical risks.

Among the palm oil counters listed on the Singapore Exchange turned, agribusiness giant Wilmar International stood out for its proposed total dividend of S$0.155 per share for FY2021 - the highest cash dividend paid out since its listing. Wilmar, which has operations in the likes of palm oil, sugar, rice and flour, saw earnings rise 23.4 per cent in the second half to a record US$1.1 billion.

But all the other companies, including smaller pure-play groups such as First Resources, Kencana Agri and Bumitama Agri, also booked better earnings and topline figures in H2. The only exception on the bourse was Mewah International, which saw net profit fall 5.1 per cent in H2 to US$55.7 million. This came despite a 13.8 per cent hike in revenue to US$2.2 billion due to higher average selling prices. The group's cost of sales - mainly its cost of inventories - weighed on margins, rising 26.8 per cent to US$4 billion.

Ong Chee Ting, regional plantations analyst at Maybank Investment Banking Group, noted that across the region, small- to mid-cap (SMID-cap) planters have performed relatively better than the large caps stocks. "SMID-cap planters which are mostly pure upstream growers have greater leverage or earnings sensitivity to higher CPO prices compared to the large-cap players, which are more integrated," he added.

Integrated players have operations in the downstream segment - the sub sectors that further process crude palm oil into intermediate or final products. Such activities provide stable processing margins that can help "cushion earnings volatility in good and bad times", Ong said.

Upstream plantation companies, on the other hand, will display stronger earnings upside in an "elevated price scenario" compared to more cost-efficient players. But they also face "higher stock price downside risk" as their earnings are likely to shrink faster than those of the integrated large cap stocks, explained Ong.

This has certainly been the case among Malaysia-listed stocks too. The likes of Sime Darby Plantation, IOI Corporation, Kuala Lumpur Kepong (KLK) and Genting Plantations all saw better topline and bottomline figures for the quarter ended Dec 2021.

Meanwhile, smaller players such as Boustead Plantations and Sarawak Plantations saw quarterly earnings more than treble year on year due to stronger average selling prices, and better demand.

Among the Indonesia-listed counters, Salim Ivomas, one of the units under the Indofood Group, and Astra Agro Lestari were companies that booked the biggest improvements in bottomline figures. London Sumatra - another unit of the Indofood Group - and Sinar Mas Agro Resources and Technology, a subsidiary of Golden Agri-Resources, also saw topline and net profit figures rise in FY2021

Analysts are positive on the prospects for palm oil stocks this year, as CPO prices are expected to remain high. DBS analyst William Simadiputra in a Mar 21 report raised his CPO price forecast for FY2022 and FY2023 to US$850, and his long-term price assumption for the commodity to US$700 per metric tonne. A tight supply of soybeans due to the drought season in South America, as well as supply bottlenecks for sunflower oil in the Black Sea region, will support CPO prices, he said.

Simadiputra has a buy call on Singapore-listed First Resources, Bumitama Agri and Wilmar, as well as London Sumatra in Indonesia.

Ong has a "neutral" call on the plantation sector, with a "buy" recommendation on KLK, Bumitama Agri and Ta Ann. UOB Kay Hian, meanwhile, has a "market weight" recommendation on the sector, with Hap Seng Plantations, Triputra Agro, Bumitama Agri and First Resources as top picks.

But analysts also warn that the demand and supply dynamics that created positive conditions for companies in the region last year may not hold this year.

Maybank's Ong noted, for instance, that La Nina, which had disrupted oilseeds production globally over the past 2 years, is forecasted to end within the next 3 months, which will deliver a boost to palm oil output.

While the Russia-Ukraine war might "dictate near-term CPO price direction", he believes market volatility could persist in the near term until the market gets a clearer picture on the extent of the impact on supply of vegetable oils.

"But let us also not forget about the potential demand destruction due to the high commodity prices in general that is quickly eroding the purchasing powers of consumers globally," he said.

Sabrin Chowdhury, head of commodities at Fitch Solutions, said prices of soft commodities have remained under pressure in recent days owing in part to the appreciation of the value of the US dollar as well as heightened concerns about demand due to the Russia-Ukraine war. Meanwhile, Malaysia and Indonesia are expected to produce more palm oil this year. "We expect prices to ease further in the coming months," added Chowdhury.

Her views were echoed by Akash Gupta, director for corporates of Asia-Pacific at Fitch Ratings. Gupta is expecting inventory levels to rise over 2022, driven by higher output. This could cause prices to correct from the current high levels.