KUALA LUMPUR, Aug 29 — The second quarter of 2020 calendar year was a boon for plantation companies as they reported outstanding financial performances due to the higher crude palm oil price amid lower production.
Their positive financial results came as economies one by one re-opened during the April to June period after a few months of coronavirus lockdown, allowing countries especially traditional palm oil buyers like China and India to begin refurbishing their inventory.
At the current level of RM2,519 per tonne (on average), the commodity is highly sought after, as crude palm oil (CPO) by India and palm olein by China.
Exports to India declined by 97 per cent to 10,806 tonnes in March year-on-year when countries imposed the lockdown, but exports rebounded by 8.8 per cent to RM82.9 billion in June.
On Bursa Malaysia, the plantation index has declined by nine per cent year-to-date.
“Nevertheless, the index has recovered by a staggering 25.8 per cent since March 18, 2020 amid the reopening of economies and likewise, share prices of major plantation companies such as IOI Corporation, Sime Darby Plantation and Kuala Lumpur Kepong have gained by more by than 20 per cent since their lows in the middle of March this year,” Bank Islam Malaysia Bhd economist Adam Mohamed Rahim told Bernama.
Meanwhile, the Statistics Department said July 2020 stocks dropped by 10.7 per cent month-on-month to 1.7 million metric tonnes, representing the fourth consecutive month of decline since April 2020.
The decline, the department said, was mainly in view of higher export demand (+4.2 per cent month-on-month) and lower production (- 4.1 per cent month-on-month).
Big firms’ Q2 performance
Among the big boys who have reported their financial results to Bursa Malaysia, Kuala Lumpur Kepong Bhd saw a jump in its net profit to RM368.69 million in its third quarter ended June 30, 2020 compared with RM48.61 million in the same period a year ago, while revenue was slightly higher at RM3.71 billion versus RM3.70 billion previously.
Commenting on the results, Kenanga Investment Bank Bhd, via its research house (Kenanga Research) said it believed the country’s third largest palm oil producer is likely to post a sequential improvement in the fourth quarter.
This is given the higher CPO price (+17 per cent quarter-on-quarter), coupled with its expectation of higher fresh fruit bunch (FFB) production (+3.7 per cent q-o-q) of 1.05 million tonnes.
“The improvement, however, could be partially neutralised by the impact of higher feedstock prices on its downstream division,” it said, adding it set a “market perform” for the stocks with a target price of RM23.10.
Perak-based United Plantation Bhd’s net profit leapt 63 per cent in the second quarter ended June 30, 2020 to RM123.59 million, as the group continued to boost CPO and palm kernel production amid better average selling prices compared with a year earlier.
Revenue improved to RM294.32 million from RM270.53 million previously, the oil palm and coconut plantation group said in a filing with Bursa Malaysia last month.
Sime Darby Plantation Bhd (SDP) also recorded a jump in net profit for the second quarter ended June 30, 2020 to RM378.00 million from RM27 million in the same period a year ago.
Revenue increased to RM3.21 billion versus RM2.86 billion while basic earnings per share stood at 5.50 sen from 0.40 sen, the plantation company said in a Bursa Malaysia filling on Thursday.
The higher CPO price also helped Malaysian-based global agricultural and agri-commodities company FGV Holdings Bhd to return to the black.
For its second quarter, the company recorded a net profit of RM20.55 million versus a net loss of RM52.20 million in the same period a year earlier while revenue went up by 0.5 per cent to RM3.29 billion from RM3.28 billion.
Moving forward, the company expects a stronger second half for its plantation sector as FFB and CPO production across its operations normalises after a slow start earlier this year.
It said demand for CPO is poised to recover as global markets open up from strict lockdowns in the first half of 2020 while the sugar sector will continue to be challenging, adding it will focus on its turnaround plan, product diversification and export markets.
FGV produces oil palm and rubber plantation products, soybean and canola products, oleochemicals and sugar products.
While some analysts are bullish on the performance of the plantation industry in the remainder of 2020, following the companies’ business layout plan (upstream and downstream), some say their future may be bearish with production expected to pick up and prices to go lower.
Research houses expect the companies to suffer on the back of rising inventory especially when India and China complete their inventory replenishment efforts.
IOI Corp Bhd, which released its results on Tuesday, said the CPO price had increased significantly from around RM2,100 per tonne in May to above RM2,700 per tonne in August after stockpiles fell to a three-year low in July.
It however warned that the commodity’s price could turn weaker later this year from the current strong level.
“Oil palm crop production is likely to increase gradually from September to November this year while the demand is expected to taper off from the high restocking activity in the major importing countries, while supported by festive demand during the Chinese Full Moon Festival and the Diwali celebration in November,” it said in a filing to the local bourse.
Moving forward, stockpiles are expected to trend upwards while the CPO price may retrace in anticipation of the upcoming peak production period which could outweigh total consumption towards the fourth quarter of 2020.
While the exemption of export duty for Malaysian palm oil products could help to partially support export demand, it would not be sufficient to offset the anticipated higher production level. As a result, this will lead to a build-up in inventory level which would further weigh on the CPO price moving forward.
As such, plantation companies are expected to see a subdued earnings performance in the coming quarters.
Labour shortage, the downside risk for the plantation industry
As the industry is currently facing a shortage of 10 per cent or 37,000 workers especially for the harvesting of FFB, companies are concerned that it may cause them lower production moving forward which would later on reflect in lower contribution from the agriculture sector to the gross domestic product.
Both the government and companies are trying their level best to lessen the impact, by trying to recruit local workers.
However, that initiative is not receiving positive response, as Malaysians especially the youth perceive this job as dirty, dangerous and difficult, and the salary is just unattractive.
The Malaysian Palm Oil Board has proposed to the government to provide extra incentives to youth to join the industry.
Sime Darby Plantation said it is starting to recruit locals to work in oil palm cultivation although the success rate has been ‘not good’.
It said normally one person can harvest between 1.5 to 2.0 tonnes of FFB per day and currently it is short of more than 2,000 workers.
Managing director Mohamad Helmy Othman Basha said the company has managed to secure between 200 to 300 local workers, but only about 10 are willing to work in harvesting work with the bulk of the workers preferring to do general work.
Currently, workers from Indonesia and Bangladesh account for about 70 per cent of the local plantation industry’s manpower.
The COVID-19 pandemic could leave Malaysia’s palm oil industry without enough workers as industry players expect some of their foreign workers to leave Malaysia, especially those from Indonesia, once cross-border travel is allowed.
In the past, when some of the workers left, new recruits would step in to replace them, but this time there may be no more incoming workers as most countries have closed their borders.