The hike in commodity prices, led by increases in crude oil prices seem to have renewed retailer interest in plantations during the past few weeks, but sector analysts say one should not get carried away with these share price increases.
"Rubber and tea prices may be up, but it is never so simple. Retail euphoria over plantations has improved, but longer term fundamentals in plantations are not sound," an analyst said.
He said costs of production in these firms are rising faster than their commodity prices.
"This together with the type of plantations, their output, their mix (some plantations have pure rubber and some have tea) and details such as whether the plantation firms charge management fees all come into play," he added.
Geeth Balasuriya, Manager Research, Acuity Brokers said the rise in plantation stocks during the last two weeks was mainly due to the increase in prices of rubber and tea.
“However despite the recovery in prices over the last few weeks, average prices remain much lower than what was witnessed last year. Therefore the Regional Plantation Companies (RPCs) will struggle to do well in the short to medium term,” he said, adding that the price increases came at the expense of production volumes and in fact the crops are down as at mid June by around 20-30% year on year, so the impact on earnings are minimal.
He said that with the pending wage revision any reasonable pay hike would put huge pressure on plantation bottom lines because wages are the biggest cost component of RPCs. “Therefore if we see a pay hike taking place this year it will be very tough financially for RPCs in the short to medium term.
So despite the recent rally in plantation stocks the near future of the sector look gloomy,” he noted, adding that things can improve if prices continue on its current trend with considerably higher volumes during the remaining part of 2009.
A stockbroker from NDB Stockbrokers said that the oil prices (Brent crude oil) have increased to US$ 72 per barrel which has increased local rubber prices to Rs.215 - Rs. 220 in June (this is relatively high when comparing with the international rubber prices).
“Therefore, possibility of further price increases in the local rubber market could be relatively low unless a sharp increase in oil prices is envisaged,” he said. |
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