Will plantation stocks grow or simply wither away?

Growth prospects are at risk from low CPO prices.

The plantation sector had a lacklustre year in 2014. Low crude palm oil (CPO) prices led to double-digit profit declines for some of the SGX’s largest plantation stocks, such as Golden Agri, First Resources, Wilmar International, and Bumitama Agri.

After the sector’s poor showing last year, UOB Kay Hian analysts noted that plantation companies are unlikely to outperform the market this year when CPO prices continue to trade sideways.

The firms’ downstream operations will remain challenging this year as most of Indonesian refineries in Indonesia are suffering from the thin or even negative refining margins. 

“We believe that this would continue in 2015 due to the overcapacity issue in the country. Also, the zero export tax for CPO in Indonesia has eliminated the margin generated from the export tax differential between CPO and RBD palm oil,” the report warned.

The report reiterated that as CPO prices are likely to stay low for 2015, plantation companies need to focus on good cost management and high productivity yield.

However, UOB Kay Hian also noted that companies which consistently deliver a good set of results and exhibit better growth and profitability are still likely to outshine their peers.

“Among the Singapore-listed purer plantation companies, First Resources stands out as the most profitable in term of EBITDA per CPO tonne as it has the lowest cost per tonne supported by stringent cost control and good productivity yield. Among the younger age profile companies, Bumitama Agri’s EBITDA per CPO tonne is relatively better, attributable to high oil yield (average of 6 years old as at 1 Jan 15). We continue to like these two plantation companies,” stated UOB Kay Hian.