SINGAPORE (Aug 21): UOB KayHian is maintaining its “market weight” for Singapore plantation stocks with a “buy” call on Bumitama Agri given its young tree age profile.

This comes on the back of rising concerns on the potential CPO (crude palm oil) price weakness going into 2018 with another round of higher palm oil production and bumper soybean crops to come, while palm oil demand is expected to be stagnant.

In a Monday report, lead analyst Leow Huey Chuen says Bumitama Agri outperformed peers with positive q-o-q earnings growth supported by the strongest production growth for 2Q17.

“We expect the production recovery to continue in 2H17, but the y-o-y increase in 2H17 will be smaller, and there will be better refining margins for 2H17. Bumitama Agri is likely to outperform its peers in 2H17 on stronger production and lower costs because of its young trees,” says Leow.

In 2Q17, the performance of First Resources came below expectations, while results from Bumitama and Golden Agri came in line.

Bumitama Agri’s strong earnings were mainly supported by higher q-o-q fresh fruit bunches (FFB) production, better than peers’ OER or Oil Extraction Rate and lower operating costs.

Overall, UOB expects FFB production to continue improving in 2H17 on the back of yield recovery as the lagged impact from El Nino is weakening. “For 1H17, 13 Indonesian companies reported a FFB production improvement of 26.3% y-o-y,” says Leow.

The y-o-y production growth in 2H17 is likely to be lower than 1H17’s due to the high base in 2H16’s, especially for 4Q16. Oil World is forecasting 2017 CPO production at 35.65 million tonnes (+11% y-o-y).

During the 2Q17 results briefing, all plantation companies under UOB’s coverage maintained their FFB production guidance, except Bumitama Agri.

Bumitama Agri is now expecting 2017 FFB production to increase 25% y-o-y in anticipation of a stronger yield recovery. On average, companies are expecting FFB production to increase 17.5% y-o-y in 2017.

The research house “hold” calls on First Resources and Golden Agri-Resources as it reckons that current prices have already factored in the higher production and earnings expected for 2H17.

As at 3.12pm, shares in Bumitama Agri, First Resources and Golden Agri-Resources are trading at 71 cents, $1.82 and 36 cents respectively.