The plantation sector's performance for 2QCY24 showed mixed results, with five companies meeting expectations, one falling short, and three exceeding projections. The overall earnings were driven by strong crop yields and elevated crude palm oil (CPO) prices, which ranged between RM3,834 to RM4,129 per metric tonne (Mt). The average selling price (ASP) of CPO strengthened to RM4,038/Mt, marking a 1.4% quarter-on-quarter increase and a 5.0% rise year-on-year. Analysts have adjusted their sector profit forecasts by +3% for FY24E, FY25E, and FY26F due to improved demand for derivative products, notably oleochemicals and biodiesel.
In terms of analyst calls, MIDF Stock Broking House maintains a NEUTRAL stance on the plantation sector, highlighting the continuing role of the upstream division as a key pillar for integrated players. Both IOI Corporation and Ta Ann remain as top picks, with BUY calls and target prices of RM4.50 and RM4.16, respectively. IOI Corp stands out for its strong production growth and lowest cost of production among peers, while Ta Ann is noted for its correlation with CPO price movements, making it a potential trading opportunity in response to CPO price increases due to prolonged dry weather.
The earnings wrap-up revealed that PPB Group underperformed due to weakness in its core business, including consumer products, film exhibition, and contributions from Wilmar International. This led to downward earnings revisions of -5.0% for FY24E, -7.3% for FY25E, and -13.6% for FY26F. The weakness was further exacerbated by a drop in fresh fruit bunch (FFB) production and oil extraction rates (OER) due to prolonged dry weather conditions affecting operations in Indonesia and Sabah.
On a positive note, demand for oleochemicals, biodiesel, and oil and fats products rebounded, significantly boosting operational profits for the sector's downstream players. Refineries, particularly in Europe, have seen improved margins despite high utility costs. However, the Chinese market remains sluggish due to weak demand and ongoing uncertainties affecting derivative products.
In light of the sector's outlook, analysts have revised their CPO price forecast to RM3,800/Mt for FY24E. Integrated players like KLK and Sime Darby Guthrie are expected to benefit from this improved outlook, with increased profits forecasted for FY24E-26F. IOI Corporation continues to be favoured for its solid upstream and downstream performance, with its refinery and oleo plant operations staying competitive due to lower production costs compared to its peers operating in Europe.