The plantation sector has seen a turnaround as most firms have posted profits and with tea production predicted to improve moderately in the next quarter while the improved weather conditions together with improved commodity prices in the global market will help to boost prices, according to analysts.
Last year saw the plantations sector in the Colombo stock market witnessing a mixed bag of earnings, but the stock market is positive in its scope in the short to medium term.
Jaliya Wijeratne, Director SMB Securities said that public listed plantation shares are seeing a pick up and that retailers seem to be rallying these stocks. “There is a lot of interest in this sector, because the scope of the plantations is quite good,” he said.
According to industry data, adverse weather conditions reduced tea production to 289.7 million kg in 2009, down by 28.9 million kg (9%) against 2008.
Sarath Rajapakse, Director Capital Trust Securities noted that if the ‘El-Nino’ type weather pattern prevail, plantations will witness a shortage in production.
According to many industry analysts, due to less production, the industry expects more favourable prices by the second half of the year. Mr. Wijeratne noted that the recent wage hike of the estate labour unions caused an impact in many plantations firms during the last quarter. “This was a wage hike of around 40% agreed with labour unions, where an average worker's daily wage of 290 rupees was increased to 405 rupees.
This clearly created a drastic impact on the cash flows of most plantation companies,” he said. He noted that since there is an increase in the commodity prices in the world market there is renewed interest in the sector.
However some analysts are cautious. "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 price. "This together with the type of plantations, their output, their mix (some are pure rubber and some are tea) and details such as whether they charge management fees all come into play," he added.
Another stockbroker said that the wage talks which saw plantation employees get wage hikes disillusioned investors somewhat, adding that the output in plantations was falling due to weather, the cost, etc.
He said the wage hike has wiped out a substantial amount of profits in the immediate future. “In addition although the prices have increased, the volumes are relatively low.”
Some industry analysts are cynical about the wages. Mr. Rajapakse said that the story about the plantations being unprofitable is a ‘myth’. “It is mostly said by the plantation management firms to tame the trade unions. During the wage negotiations they do some creative accounting to show a drop in profits,” he said.
Currently there are 18 plantation companies listed on the Colombo Stock Exchange while tea, rubber and oil palm are the main income generating crops of these companies. In order to reduce the risk relating to the dependency on the main crops, most of the companies have diversified into other sectors such as coconut, forestry, mini hydro power generation and tourism.