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Khairlia Khairulzaman


The Edge Markets MY



Plantation earnings in 2019 seen mixed after weaker CPO prices in 4Q18

7 Mar 2019 (The Edge Markets MY) Plantation sector, Maintain underweight on respective sectors: The recently concluded corporate earnings season was unsatisfactory, in our opinion. Among 12 plantation companies under our coverage, only one beat our expectation, namely Sarawak Plantation Bhd (SPB). A total of six companies missed our earnings targets, whilst five companies came in within our expectation. Earnings were generally lower quarter-on-quarter (q-o-q)/year-on-year (y-o-y)/year to date (YTD) mainly due to: i) lower palm product price realised and sales volume transacted; ii) higher operational costs; and iii) huge one-off impairments and higher net foreign exchange losses on US dollar-denominated borrowings.

From our compiled data, companies with a higher percentage of mature estates and/or exposure in Indonesia tend to register higher growth in fresh fruit bunch (FFB) production that is IOI Corp Bhd, Hap Seng Plantations Bhd (HPL), Genting Plantations Bhd (GENP) and IJM Plantations Bhd (IJMP), which registered double-digit growth q-o-q. However, companies with young oil palm trees and land bank in Sarawak or Sabah (Sarawak Oil Palms Bhd (SOP), TSH Resources Bhd (TSH) and  TH Plantations Bhd (THP) recorded relatively lower growth in FFB production.

The weak average selling price (ASP) of palm products has negatively impacted revenue generation capability of plantation company in 4Q2018, hence squeezing the margin of upstream operation. We believe plantation companies are at risk of further earnings disappointment in the next 1Q2019 earnings as crude palm oil (CPO) prices realised is expected to hover between RM2,150 per tonne-RM2,300 per tonne against RM2,393.50 per tonne-RM2,550.50 per tonne in 1Q 2018 (although better than 4Q2018). We forecast earnings growth for companies under our coverage to be a mixture of positive and negative growth in 2019, averaging at 13% y-o-y.

We believe six primary issues will likely play out for 2019, hence exerting downward pressure on CPO price namely: 1) sluggish export demand; 2) higher CPO inventory; 3) bearish soybean and soybean oil prices — CPO losing its competitiveness; 4) strengthening of the ringgit; 5) volatile crude oil prices; and 6) low biodiesel off-take. We maintain our average CPO price forecast for 2019 of RM2,280 per tonne and RM2,350 for 2020.

We retain “underweight” on the sector as most of the companies under our coverage are fully valued and are at risk of further earnings disappointment on weak palm product prices outlook. We have to “hold” on KLK (TP: RM24.25), Batu Kawan Bhd (TP: RM17.28), HAPL (TP: RM1.90), TSH (TP: RM1.06), GENP (TP: RM10.33), IOI (TP: RM5.00), SOP (TP: RM2.46), FGV (TP: RM1.13) and Sime Darby Plantation Bhd (TP: RM5.03). Sell on IJMP (TP: RM1.47), Under review on SPB; whilst a non-rated for TH Plant.

Among the 12 plantation companies under our coverage, only one beat our expectation, that is SPB. Five companies came in within our expectation whilst six companies or 50% of our coverage missed our targets. Additionally, five out of 12 companies that is IOI, KLK, BKawan, Sime Darby Plant and HAPL reported better q-o-q performance mainly due to higher profit from a downstream segment, aided by non-recurring gain or forex gain. For HAPL, the q-o-q earnings growth was due to higher production and sales volume transacted that helped to mitigate a weak ASP of palm products. — BIMB Securities Research, March 5