This article first appeared in The Edge Financial Daily on August 17, 2017

KUALA LUMPUR: A confluence of factors including weaker palm oil demand from India and potential crop-disruptive weather effects precipitated the selldown of plantation counters yesterday.

“There is this expectation of weaker demand from slower purchase and demand from India,” MIDF Amanah Investment Bank Bhd deputy head of research Mohd Redza Abdul Rahman told The Edge Financial Daily in a text message.

“Also, there is this weather effect, which is due to the expectation of heavy rain,” he said, adding that the drop in earnings by big plantation firms such as Kuala Lumpur Kepong Bhd (KLK) and Batu Kawan Bhd had also partially contributed to the negative sentiments.

“In a way KLK and Batu Kawan are a set of the barometers [for the plantation firms] since they are the first big ones to come out with the quarterly results.

“However, if you look at the smaller plantation firms, we saw — and in some instances will see — them yielding better earnings,” he said, adding: “But the margins have declined too, owing to the lower palm oil prices in [the second quarter of 2017].”

KLK, the second-largest constituent of the KL Plantation Index, saw a large selldown of its shares due to lower earnings, which some analysts have described as “dismal” and “disappointing”.

KLK’s net profit for its third financial quarter ended June 30, 2017 plunged 56% to RM112.76 million, from RM253.39 million a year earlier, due to losses at its oleochemical business and lower revenue from property segment.

“KLK was affected by its downstream business, which saw increased volatility in crude palm kernel prices, as well as affected by its investments for which it suffered a loss,” said Public Investment Bank Bhd analyst Chong Hoe Leong.

“The selldown [of plantation firms] is likely due to expected weaker export numbers and the recent decline in crude palm oil (CPO) prices,” said Kenanga Investment Bank Bhd analyst Voon Yee Ping.

Data from the Malaysian Palm Oil Board showed that the CPO price, which closed at RM2,622 yesterday, had decline by 20% over the last six months.

Although plantation players are generally seeing an increase in the fresh fruit bunch production trend, Chong is expecting “softer CPO prices” that may remain under pressure in the near term.

“This would affect profitability as supply increases ahead of the demand,” he said.

On outlook, Voon expects the upstream plantation sector “to be better” on price increases and improved production, while the downstream sector may face “a bit more volatility”.

Meanwhile, Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said the latest trade war between the US and China could indirectly affect the price of CPO, which is often benchmarked against soy oil.

“I am cautious about the near-term outlook for the plantation sector. China is importing about half of the US soybean output. If the trade tension escalates, China may lessen the soybean import and what will happen to the CPO prices?” he asked.

Of the 40 component stocks of the KL Plantation Index, 11 ended trade in the red, nine closed higher and 20 were unchanged.