A strong 6.0-magnitude earthquake rocked the state of Sabah, prompting concerns that palm oil output from Sabah, which account for 31% of Malaysia’s palm oil production, could be affected. Our checks with the planters reveal that their palm oil operations have either been unaffected or just minimally impacted by the event as most of their estates are located some distance away from where the earthquake struck. We maintain our Neutral rating, with First Resources as our top pick.
Tremors shook Kota Kinabalu and other parts of Sabah’s west coast on Friday after a magnitude 5.9 earthquake hit near Ranau district. Initial reports from the Malaysian Meteorological Services Department said the quake struck 16km northwest of Ranau at 7.15am. The US Geological Survey put the Richter scale at 6. No tsunami warning was issued. It said that the strong quake struck at a depth of 10km, with its epicentre located 19km from the town of Ranau, and 54km from Kota Kinabalu. Apart from the state capital, the tremors were felt in the northern Kudat and Kota Marudu districts, and as far away Beaufort in the south. The tremors shook buildings and rattled windows prompting people to run out of their houses, shops, and even the Kota Kinabalu International Airport terminal. The extent of the damage cannot be immediately ascertained.
What We Think
It is not uncommon for Sabah to be hit by earthquakes. This particular event gained more media attention than others as it struck near the state capital Kota Kinabalu and Mount Kinabalu, a popular tourist attraction in Sabah. It may also be the second strongest earthquake to have hit Sabah. Our tracking of past earthquakes in Sabah reveal that the strongest earthquake in Sabah was a 6.2 magnitude earthquake that hit near Lahad Datu on 26 July 1976, or 39 years ago. There are some concerns that this could adversely impact palm oil output from Sabah, as the state accounts for 28% of Malaysia’s total planted palm oil estates and 31% of total CPO output.
We checked with listed planters (IOI, KLK, Sime and Genting Plantations) under our coverage with estates exposure in Sabah. The feedback was that the earthquake had minimal or zero impact on palm oil production and infrastructure of the planters under our coverage. This is because most of the palm oil estates are located in Sandakan and Lahad Datu at the eastern end of Sabah, whereas the earthquake affected Ranau on the west coast of the state.
What You Should Do
This event highlights the risks of earthquakes in one of the key producing regions of palm oil in Malaysia. However, the past and latest events have not had any significant impact on palm oil output from the Sabah region. Our view is that production from Sabah is more vulnerable to the dry weather experienced by the planters in mid-Feb to mid-March and the on-going El Nino. We maintain our CPO price forecasts and Neutral rating on the sector. (Read Report)
Source : CIMB Research