Investment Highlights

• Mainly below expectations. 4 of the companies in our stock universe performed below our expectations while another 2 met our forecasts. Genting Plantations (GenP) exceeded our estimates as the group drew down inventory from 1Q2023, which boosted sale volumes in 2Q2023.

• Quarterly production trends were mixed in 2Q2023. FFB production of 4 companies fell QoQ in 2Q2023 while the balance 3 companies recorded stronger output. We believe that companies with significant exposure to Sabah experienced weaker FFB production in 2Q2023 in contrast to Indonesian operations, which enjoyed higher output. Generally, FFB production in Malaysia slid MoM in April as estate workers took a break during Hari Raya Puasa.

• Companies with Sabah exposure experienced softer FFB output in 2Q2023. Hap Seng Plantations, IOI Corporation, FGV Holdings and KL Kepong recorded 1%-9% QoQ declines in FFB production in 2Q2023 while TSH Resources, GenP and Sime Darby Plantation (SDP) chalked up 9%-12% increases.

• On a yearly basis, however, FFB production rose in 1H2023. Companies in our coverage recorded FFB production growth of 1.8%-12.2% YoY in 1H2023 on the back of enhancements in FFB yields. Exceptions were TSH Resources, SDP and FGV. FGV’s FFB output plunged by 10.6% YoY in 1H2023 as it takes time for new estate workers to be skilled in harvesting. SDP’s FFB production edged down by 3.1% while TSH’s FFB output declined by 3.6%.

• Average realised CPO price fell by 20%-40% YoY in 1H2023. The companies in our coverage recorded average CPO prices of RM3,500/tonne-RM4,000/tonne in 1H2023. According to MPOB, average CPO price was RM3,921/tonne in 1H2023, 37.8% lower than the average price of RM6,302/tonne in 1H2022. On a quarterly basis, average MPOB spot price was RM3,846/tonne in 2Q2023 vs. RM3,997/tonne in 1Q2023.

• Cost of CPO production per tonne increased in 1H2023. This was mainly due to higher costs of wages and fertiliser. The planters recruited more estate workers from Indonesia and India towards the end-2022 and 1H2023. Also, minimum wage rose by 5%-9% in Indonesia in 2023E. In Malaysia, minimum wage increased to RM1,500/month from RM1,200/month in May 2022. Fertiliser costs climbed by more than 30% YoY in 1H2023. Genting Plantation’s (GenP) all-in cost of production rose to RM2,850/tonne in 1H2023 from RM2,190/tonne in 1H2022. SDP’s cost of production (cost to customers) was RM2,800/tonne in 1H2023 vs. RM2,400/tonne in 1H2022.

• Poor downstream earnings in 1H2023. Downstream or manufacturing EBIT of large planters shrank in 1H2023 as selling prices and sales volume slumped. KLK’s manufacturing division (refining and oleochemicals) swung into losses in 2Q2023 while SDP’s downstream EBIT (trading, bulk and differentiated products) contracted by 50.9% YoY in 1HFY23. IOI’s manufacturing EBIT (excluding associates and fair value changes) slid by 90.7% QoQ to RM9mil in 2Q2023.

• NEUTRAL. We believe that CPO prices would be constrained by higher supply of soybean in the US and Brazil. In addition, Malaysia and Indonesia are entering the peak palm production period in 2H2023. Our average CPO price assumptions are RM3,800/tonne for pure planters in Malaysia and RM3,500/tonne for the large companies (after accounting for the Indonesian price discount of RM500/tonne-RM1,000/tonne).

Source: AmInvest Research - 1 Sept 2023