Palm oil stocks record stronger H1 revenue, profits on higher CPO prices, demand

Singapore

SINGAPORE-LISTED palm oil counters enjoyed a lift in their financial results across the board amid higher crude palm oil (CPO) prices and stronger demand for their products.

Year to date, palm oil futures are up 54.1 per cent as supply from producing countries Malaysia and Indonesia came under pressure due to drier weather. Data from the Malaysian Palm Oil Board (MPOB) showed that July output hit a four-month low of 1.5 million tonnes, down 16 per cent on a year-on-year (y-o-y) basis and 5 per cent on a month-on-month (m-o-m) basis.

This brings CPO output for the first seven months of 2021 to 9.9 million tonnes, down 9 per cent year on year. Malaysia's stockpile in July was also down to 1.5 million tonnes, a decline of 12 per cent y-o-y and 7 per cent m-o-m.

Fitch Solutions noted in a recent report that supply levels have been coming in "below expectations" in Malaysia in Q1 due to labour shortages that have been aggravated by the Covid-19 pandemic, which is currently keeping stocks at "multi-year lows".

The higher prices have in turn lifted the earnings and revenues of nearly all the palm oil players listed in Singapore. Although some of these companies booked lower sales volumes in H1, higher average selling prices (ASPs) of palm oil products such as CPO and palm kernels helped boost topline and bottomline figures.

Golden Agri-Resources and Indofood Agri Resources swung back into the black for the first half of the year. Golden Agri reported net profit of US$153.2 million, reversing from a net loss of US$156.9 million in the year-ago period. Revenue for the period rose 31.4 per cent to US$4.5 billion from US$3.4 billion. The group declared an interim dividend of 0.528 Singapore cent per share.

Meanwhile, Indofood Agri posted net profit of 152.7 billion rupiah (S$14.4 million) for H1 compared to a loss of 429.4 billion rupiah in the corresponding period last year. Revenue increased 30.3 per cent to nine trillion rupiah.

Meanwhile, other palm oil companies reported higher earnings and revenue for H1. Bumitama Agri saw net profit increase 9.7 per cent to 484 billion rupiah from 441.3 billion rupiah in the year-ago period. Revenue increased 35.9 per cent to 5.4 trillion rupiah on the back of higher sales volume and average selling prices.

Wilmar International, which also has substantial operations in sugar and grains, posted net profit of US$750.9 million for H1, up 23 per cent y-o-y from US$610.5 million. Revenue grew 30.4 per cent to US$29.5 billion, from US$22.7 billion in H1 2020.

The two exceptions to the general trend were Kencana Agri and First Resources.

Kencana's revenue inched up a mere 3.5 per cent y-o-y to US$63.8 million, from US$61.7 million. Although its average selling price for CPO was 16 per cent higher year on year, CPO sales volume declined 14 per cent y-o-y. The company did, however, report a profit increase - from US$400,000 to US$10 million. This was partly thanks to changes in biological assets. Kencana recorded a US$7.8 million gain on fair value changes in biological assets for the six-month period, versus a fair value loss of US$236,000 for the year-ago period.

First Resources, meanwhile, took a hit from higher export taxes following a progressive export levy structure implemented in Indonesia from December last year. The company's net profit fell 16.7 per cent y-o-y to US$32.6 million from US$39.1 million, although revenue rose 48.4 per cent to US$412.9 million.

The company said it is looking forward to a better performance in H2 as Indonesia cut its export levies for palm oil products in July.

Market watchers are expecting CPO prices to hit a record high in 2021 amid a combination of higher demand levels and tight supply.

Maybank Kim Eng analyst Ong Chee Ting said CPO ASPs are likely to average at RM3,500 (S$1,125) per tonne in 2021, up from the house's previous forecast of RM3,100 per tonne. The latest guidance would surpass the current record price for CPO of RM3,274 per tonne in 2011, said Mr Ong. "While we doubt the current high CPO prices are sustainable, it will nonetheless stay lofty (by historical standards) till early next year," said Mr Ong.

He added that as at Aug 10, CPO prices are at "healthy discounts" to other major vegetable oils such as soybean oil and rapeseed oil.

Fitch, meanwhile, has upped its CPO price forecast for a second consecutive quarter. It said that the market is proving to be even tighter than it had initially expected. Fitch's price forecast for 2021 now stands at RM3,400 per tonne, up from RM3,050 per tonne previously.

"Stocks are low for example in India and China, which means imports will recover into 2021 and 2022. The ongoing rally in the soy complex is also fuelling palm oil prices," said Fitch.

But prices are expected to lose some steam beyond this year. MBKE's ASP for 2022 to 2023 stands at RM2,800 per tonne while Fitch's forecast for 2022 stands at RM2,900 per tonne.

Fitch is expecting a bulk of the demand recovery to come in 2021, while consumption growth is likely to taper in 2022. Production will also pick up in H2 2021 and in 2022 as border controls are eased gradually, which will also push palm oil prices lower in the coming quarters.