'Buy' Wilmar and Golden Agri on better performance in lower CPO price environment: RHB

Khairani Afifi Noordin
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RHB expects a q-o-q decline in sector earnings in 1QFY2023 due to lower CPO ASPs and lower production in the off-peak season.

RHB Group Research analysts Hoe Lee Leng and Syahril Hanafiah have maintained “neutral” on the plantation sector, continuing to advocate integrated players such as Wilmar International F34 and Golden Agri-Resources E5H as they perform better in a lower crude palm oil (CPO) environment.

Hoe and Syahril note that Malaysia’s palm oil inventory dropped 6.6% m-o-m in February due to the low output season coupled with floods experienced in key states. They expect palm oil stock levels to continue declining in March as a result of low production as well as rising festive demand.

“As for sector earnings, we expect a q-o-q decline in 1QFY2023, on the back of lower CPO average selling prices (ASPs) and lower production in the off-peak season,” they add.

The analysts highlight that they are making no changes to their CPO price assumptions of RM3,900 and RM3,500 for 2023 and 2024. In an earlier report, RHB notes that most speakers at the 2023 annual Palm & Laurics Outlook Conference & Exhibition declined to give average price forecasts for the year.

Of those who did give price forecasts, the analysts saw a trend of either relatively neutral or more bullish price projects and nothing in between. Three speakers gave neutral to slightly bearish price projections ranging from RM3,760 to RM4,200 per tonne, while three others gave more bullish price projections of between RM4,000 to RM5,300 per tonne.

RHB saw mixed earnings for the 4QFY2022 reporting season, with six planters in its coverage within the region booking above-expectations earnings, while give were in line and two came in below. The pure Indonesian planters saw earnings which were mostly above expectations, due to the benefit of the tax-free levy period which distorted ASPs during the period.

Hoe and Syahril saw an average 4.1% output growth for planters in Malaysia in 4QFY2022. Most planters expect a recovery in output this year, ranging from mid-single digit to low double digits on the back of an improved labour workforce. The labour shortages are expected to be fully-resolved by 1HFY2023.

Meanwhile, in Indonesia, the analysts saw an average 12% y-o-y output growth. They note that The Association of Indonesian Palm Oil Producers’ official 4QFY2022 numbers differed slightly with an 11.4% y-o-y increase, bringing FY2022 CPO growth to -0.1% YoY. For 2023, Indonesian planters are expecting a small single-digit recovery in production output, the analysts add.

RHB continues to see decently high margins for players in Malaysia in 4QFY2022, albeit lower q-o-q due to the tax advantage during the Indonesian tax levy holiday. That said, margin for Indonesia’s downstream players remained weak in 4QFY2022. With the reinstatement of the tax levy mid-November 2022, there should be a reverse happening in 1QFY2023, the analysts note.

RHB has “buy” calls on Wilmar and Golden Agri with target prices of $4.65 and 34 cents respectively.

As at 11.01am, shares in Wilmar and Golden Agri are trading at $3.96 and 27.5 cents respectively.

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