• Adopt a tactically positive trading strategy. 3Q23F should be a stronger quarter QoQ for the sector in terms of earnings, given the seasonally higher FFB output and flattish prices. While the peak season could have ended for the Indonesian planters, we believe the Malaysian players could still see at least 1-2 more months of stronger production in 2023. We continue to advocate the purer planters as beneficiaries of the price upcycle we expect to see from late 2Q24 onwards, once El Nino impacts productivity. We maintain our NEUTRAL sector weighting.

• 3Q23F earnings to rise QoQ for Malaysian and Indonesian planters... QoQ FFB output was generally higher, given the peak output season while CPO prices were flattish. In Malaysia, FFB output for companies under our coverage rose by an average of 24.8% QoQ in 4Q23, while spot CPO prices contracted by 1.0% QoQ in 3Q23. In Indonesia, we estimate that 3Q23 FFB output for stocks under our coverage rose 18.5% QoQ (based on seasonal trends) while CPO prices, net of taxes, rose 5.0% QoQ.

• … But be flattish YoY. YoY, we should see a flattish earnings growth trend for planters in both Malaysia and Indonesia. In Malaysia, average FFB output rose 4.9% YoY in 3Q23, while spot CPO prices dropped 4.3% YoY. Indonesia’s FFB output is estimated to have fallen 4.9% YoY in 3Q23, while net CPO prices rose 1.5% YoY.

• 3Q23F is likely to bring mixed earnings, based on our estimates of production output alone (Figure 1), given the seasonally stronger output. Four may underperform full-year forecasts based on FFB output (Kuala Lumpur Kepong, First Resources, Bumitama Agri and Golden Agri), We expect five planters to book numbers that are largely in line (including the two JCI-listed planters which have already released results that were within expectations), while only one may chalk results that are stronger than projected (IOI Corporation).

• For planters with downstream operations in Indonesia, we expect margins to weaken QoQ and YoY in 3Q23, due to a smaller tax differential between upstream and downstream products of USD48/tonne (vs USD63 in 2Q23 and USD87 in 3Q22). Conversely, Malaysian downstream counterparts may see slightly better QoQ margins due to the decrease in competition from Indonesia.

• Stick to a NEUTRAL sector call, with a tactically positive trading strategy. We make no changes to our MYR3,900/tonne CPO price assumption for 2023 and 2024. We continue to prefer Malaysian planters vs regional players, as Indonesia’s tax structure makes Indonesian plantation companies’ earnings less competitive vs that of their Malaysian counterparts. Top Picks: Sarawak Oil Palms, Ta Ann, IOI Corporation, Golden Agri and PP London Sumatra Indonesia.

Source: RHB Securities Research - 3 Nov 2023