This article first appeared in The Edge Financial Daily on November 18, 2019

KUALA LUMPUR: After suffering through the past two years from low crude palm oil (CPO) prices, plantation companies are beginning to see some light at the end of the tunnel.

There are now enough reasons to believe that plantation companies could register stronger earnings for the fourth quarter of 2019 (4Q19) which — as PublicInvest Research analyst Chong Hoe Leong puts it — could well be their best quarter since 2017.

“We think the upcoming 3Q19 corporate results for Malaysian plantation companies may still be lukewarm, since the rally in CPO prices had only started in late August.

“But 4Q19 results could be one of the strongest quarterly results seen since 2017. Small- to mid-cap plantation stocks remain our favourite especially Sarawak Plantation Bhd and Ta Ann Holdings Bhd as valuations remain attractive at current levels,” Chong added.

Last Monday, industry regulator Malaysian Palm Oil Board (MPOB) said the country’s palm oil inventories dipped 4.1% to 2.3 million tonnes — its second lowest level this year after August’s 2.25 million tonnes — as output fell and the pace of exports quickened.

The MPOB in September revised Malaysia’s 2019 annual output slightly lower to 20 million tonnes from its initial forecast of 20.3 million tonnes, and said it expected inventories to fall to two million tonnes by December.

“The MPOB report emerged better than expected, offering a bullish outlook to the already strong prices, said Singapore-based Palm Oil Analytics owner and co-founder Dr Sathia Varqa. “CPO prices are likely to continue climbing in November and December with little downside risks for now.”

Varqa believes the improved selling prices will translate into strong plantation companies’ earnings as soon as in 4Q19.

“However, [the] full-year average is still expected to be below of that of last year,” he said when contacted.

CPO futures have regained much of their lost ground, closing at a two-year high of RM2,627 a tonne on the day Malaysia’s October palm oil statistics showed lower-than-expected production and better-than-expected exports.

Last Friday, the benchmark palm oil price settled at RM2,568 a tonne, still up about 32.6% from its 2019 low of RM1,937 in July.

PublicInvest Research’s Chong believes there is still room for CPO futures to rise to breach the RM2,800-level in the coming months on tightening CPO supplies.

Stockpiles are expected to continue to decline following the commencement of an earlier-than-usual low production season, as well as a nearly 20% month-on-month growth in exports as seen in preliminary estimates tracking the first 10 days of November.

There should be stronger demand towards year end from China and the European Union (EU), as buyers tend to lock in orders ahead of the possibility of higher palm oil export duty in both the Indonesian and Malaysian markets since CPO prices surpassed the minimum threshold level of RM2,250 a tonne, he added.

However, Maybank Kim Eng analyst Ong Chee Ting cautioned against extrapolating the preliminary exports statistics for the rest of the month. CPO prices are also likely due for a short correction before gaining strength again in the first half of 2020, he said.

“The recent jump in CPO price has sharply narrowed the price discount of CPO to soybean oils to US$83 (RM344.45) to US$114 per tonne, below historical averages. Furthermore, palm biodiesel is now trading at a premium to diesel price which will discourage discretionary biodiesel blending.

“We believe palm oil has lost some price competitiveness and this will be reflected in slowing exports in the coming months,” Ong added.

Nevertheless, given the lower carried forward stocks into 2020, biological tree stress, and slower growth in the mature oil palm areas due to the lack of new plantings in both Malaysia and Indonesia since 2015, Ong expects stronger CPO prices in 2020 and 2021 than in 2019 as overall palm oil supply tightens.

Maybank Kim Eng maintains its CPO average selling price forecast of RM2,100 a tonne for 2019, RM2,300 for 2020, and RM2,400 for 2021.