Inventory increased 9.3% mom to 2.45m tonnes

• CPO production rose 1.1% mom to 1.84m tonnes

• Palm oil exports dropped 18.8% mom to 1.41m tonnes.

• Average CPO price for 2019 of RM2,050/MT maintained.

• Maintain Underweight on the sector

October closing stocks rose to 2.45m tonnes

Malaysia’s September 2019 inventory climbed 9.27% mom to 2.448m tonnes. The higher inventory figure reflects the higher production and higher PO import of 71.1k tonnes compared to 51.1k tonnes in August 2018. Stocks of CPO and PPO (processed PO) increased 4.8% and 15.3% mom to 1.35m tonnes and 1.10m tonnes respectively during the period. We expect stock level to remain higher in the coming months as production increases and demand moderates.

Export dropped 18.77% mom to 1.41m tonnes

Palm oil export volume dropped 18.8% mom to 1.409m tonnes in Sep 2019 as major importing countries like India, China, EU and USA lowered their intake of PO. India registered the biggest drop of 43.6% followed by USA (-38.4%), China (-25.0%) and EU by -5.2%. We believe PO export will continue to be muted in the next couple of months given 1) absence of festivities, 2) slower demand from India, and 3) ample supply and high stock level of PO from Malaysia and Indonesia.

Source: BIMB Securities Research - 11 Oct 2019

• We continue to like GHL for the strong prospects of its TPA business benefiting from governments’ push for cashless payments. With Paysys, this further emboldens its prospect with access to over 100,000 terminals.
• We expect its merchant money lending activity in Malaysia and Thailand would further enhance operating leverage on top of the growing TPA business. 
• Nonetheless, near term earnings risks are inherent amidst intense competition amongst banks while some of the merchants acquired are still in its gestation period. We pare down 2019-21F earnings estimates by 3-30% on higher net opex assumptions.
• Maintain BUY at lower RM1.80 TP (from RM2.00), implying 45x 2019F PE and 37x for 2020F before easing to 29x by 2021F. We believe this is fair given the attractive long-term growth potential it offers.
• Playing the long game
• The TPA business benefits from the support of governments across the region towards a cashless economy. Additionally, the increasing internet penetration and smartphone adoption has provided the necessary platform to drive TPA’s growth. The acquisition of Paysys in Apr 2018 further emboldens the prospects of GHL’s TPA business as it can potentially access new merchants via Paysys’ over 100,000 terminals across Malaysia.
• Merchant money lending – a potential business In Aug 2019, GHL received approval to provide money lending services in Malaysia and Thailand. While still early days, GHL plans to extend the services to existing merchants within its TPA network. This should enhance GHL’s revenue per merchant and further entrench its market presence. GHL currently has 87,000 point-of-sales (POS) across the two countries.
   
• Near-term inherent risks
• Despite what we see as GHL’s promising long term prospects, near term risks are inherent. Revenue growth has sustained at 12% over 2015-2018 but gross margins are dwindling owing to competition within the banks and e-wallets as well as some of its POS still in its gestation period. We cut 2019-2021F earnings by 3-30% to reflect the higher net opex assumptions.
   
• Maintain BUY at lower TP of RM1.80 (from RM2.00) Reiterate BUY with a lower DCF-derived TP of RM1.80 (from RM2.00) (WACC: 8%, terminal growth rate: 3%), implying 2019/2020F PE of 45x/37x respectively. We believe this is fair owing to the attractive growth potential its TPA business provide in the long run and the potential structural growth from complementary services.

Source: BIMB Securities Research - 11 Oct 2019

• The government raised petrol dealers’ commission for diesel by 3sen/liter and petrol by 2.81sen/litre in early 2019. While this led to higher gross profit and opex it had no impact to earnings.
• Beginning 2020, the blanket subsidy for RON95 will be removed and retail price will be floated to market price. We expect no interruption to operation as dealers are in better position to cope with higher working cap needs given higher commission.

• We maintain our earnings estimates for now as we expect the blanket subsidy removal would have minimal impact to sales volume in view of depressed crude oil prices.

• BUY with an unchanged DCF-derived TP of RM26.00 which implies 27x FY19F P/E. The stock makes a compelling investment case in view of its defensive attributes.

Impact of hike in dealer commission

The government had raised petrol dealers’ commission in early 2019 which should translate to a more robust working capital management for the dealers (Chart 1). For PetDag, this saw higher revenues and gross profits as MFRS15 accounting standard recognises commissions in its revenues; this is then expensed as selling and distribution costs which negates any impact to the bottomline.

The return of managed float system

With the impending reintroduction of the managed float system in 2020 and targeted fuel subsidy (Table 1), we expect to see minimal impact to sales volume. The tepid outlook for crude oil prices should translate to manageable volatility in fuel pump prices, in our view. We also expect dealers to be in better shape to cope with the rising working capital requirement given higher commissions. According to the Petrol Dealers Association of Malaysia (PDAM), 50 dealers had quit the industry when the weekly float price mechanism was first introduced back in 2017.

Maintain earnings forecast

We retain our earnings forecast for now as we expect the blanket subsidy removal to have minimal impact to sales volume in view of depressed crude oil prices. In near term, we expect PetDag to deliver stronger earnings in 3Q19 as it benefits from jump in MOPS price in Sept 2019 due to the attack on Saudi Aramco facilities.

Reiterate BUY; TP RM26.00

Maintain BUY with an unchanged DCF-derived TP of RM26.00, implying 26.7x FY19F P/E (Table 2). We believe fundamentals are intact; with stock price trading near its -1SD P/E band (Chart 2), we believe the stock makes a compelling investment case owing to its defensive attributes.

Source: BIMB Securities Research - 10 Oct 2019

Foreign portfolio flows recover in September

• Foreign holdings of MYR debts securities increased to RM189.1bn

• Foreigners bought RM0.5bn of MGS

• Total portfolio inflow of RM0.34bn for equities and debt securities combined

• FTSE Russell maintains Malaysia on WGBI a positive for Malaysia’s bond market

Foreign flows into Malaysia’s debt assets improved in September, reversing the selling trend in August. Foreign investors bought Malaysia’s debt securities in September as total foreign holdings increased by RM0.9bn to RM189.1bn. Foreign holdings of MGS increased by RM0.5bn to RM154.2bn (Aug: RM153.7bn; Jul: RM154.7; Jun: RM149.1bn). While total amount of foreign holdings of GII was flattish, the foreign share of GII ticked higher to 4.7% (Sep: RM15.3bn; Aug: RM15.3bn; Jul: RM14.7bn; Jun: RM14.7bn). These increased foreign holdings of Malaysian government bonds (MGS & GII) by RM0.5bn to RM169.5bn, or 22.9% of total bonds outstanding in September. For MGS alone, foreign investors held 37.5% of total MGS outstanding. Foreign holdings of discount instruments increased by RM0.3bn to RM7.6bn as foreign investors bought Malaysian Treasury Bills. Foreign holdings of PDS increased slightly by RM0.1bn to RM12.0bn. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in September 2019 were higher by RM0.9bn, bringing total foreign ownership of MYR bonds to RM189.1bn or 12.6%.

As at end-September, international investors bought RM0.9bn of Malaysian bonds (Aug: -RM0.1bn; Jul: +RM5.7bn) whilst foreign investors continued to sell equities albeit at a slower pace (Sep: -RM559m; Aug: -RM2.6bn; Jul: -RM79m). This means a total portfolio inflow of RM0.34bn for equities and debt securities combined. Meanwhile, Bank Negara Malaysia’s (BNM) international reserves fell USD0.5bn to USD103.0bn as at end-Sep from USD103.5bn as at end-Aug. It remains sufficient to finance 7.6 months of retained imports and is 1.1 times total short-term external debt.

Source: BIMB Securities Research - 8 Oct 2019

Impact of China’s hog production on palm oil

• China’s PO import rose 44% yoy to 4.6m tonnes in the first 8 months of 2019 as African Swine Fever (ASF) hurts domestic soybean crushing.

• Placing other factors constant, we found that there are strong positive linear relationship between swine meat production and soybean crush/meal.

• For Jan-July period, PO and PKO intake by China from Indonesia increased 47% yoy to 3.2m tonnes. Malaysia exports to China rose 13% yoy to 1.2m tonnes.

• We forecast China’s PO intake for Malaysia’s PO will increase by c. 15% yoy to 2.1m tonnes in 2019.

• Maintain Underweight the sector against the likely scenario that a lower ASP of palm products would continue to be a risk to planters’ earnings.

Does the ASF outbreak in China impact PO demand?

China’s PO import volume rose 44% yoy to 4.6m tonnes in the first 8 months of 2019. For Jan-Aug period, Malaysia’s PO export volume to China increased 29% yoy to 1.41m tonnes from 1.09m tonnes recorded in 2018. We believe the higher demand was due to the ASF outbreak aided by lower import of soybean from US that have impacted China’s domestic soybean crushing. We forecast China’s intake for Malaysia’s PO to increase by c. 15% yoy to 2.1m tonnes in 2019, hence, maintaining our forecast for Malaysia’s export of PO to increase by 6.8% yoy to 17.6m tonnes in 2019.

What to expect in Q4 2019?

CPO price are expected to remain under pressure with limited upside seen in Q4, 2019. Weaker-than-expected demand and high production season may provide some resistance to PO price recovery as stockpiles are expected to increase from 2.25m MT in August to 2.42m in December. We anticipate that stock level to start to build up again in Oct/Nov as production growth is rose, albeit marginally at 2.4% yoy to 19.99m for 2019. We think CPO price might trade between RM2,000/MTRM2,300/MT in the near term as long as SBO price is traded in CBOT trades below 30cent USD/bushel or USD660/MT.

Underweight call on sector retained

Given the weak market sentiment on US-China trade war, slower global economy, and ample supply of edible oils, we believe CPO price for 2019 will average RM2,050/MT and RM2,200/MT for 2020. All in, we anticipate that a lower ASP of PO products would continue to be a risk to planter’s earnings. Currently, most of the companies under our coverage are fully valued and are at risk of further earnings disappointment. We have Hold on KLK (TP: RM23.80), HAPL (TP: RM1.44), TSH (TP: RM0.91), GENP (TP: RM10.33), SOP (TP: RM1.98), FGV (TP: RM0.96), Sarawak Plant (TP: RM1.65) and SDPL (TP: RM4.83); with Buy on IOI (TP: RM5.00) and a non-rated for TH Plant. Rerating catalysts would include 1) tight supply - low FFB production in Malaysia and Indonesia, 2) higher biodiesel take-off, 3) rally in soybean oil prices, and 4) higherthan expected demand

Source: BIMB Securities Research - 7 Oct 2019

• Overview. 2QFY20 core earnings fell 37% yoy to RM50m due to higher minority charges from FPSO JAK and expiry of FPSO Allan in Jan 2019. On QoQ basis, earnings were slightly lower by 3%.

• Key highlights. Orderbook as at 2QFY20 stood at US$4.9bn (or RM20.6bn) which is c.20x FY20F revenue.

• Against estimates: Below. 1HFY20 core profit of RM101m (-28% yoy) made up 40% and 39% of ours and consensus’ forecasts respectively. We deem this as inline as we expect stronger 2HFY20 on new contribution from FPSO Helang hire charter.

• Dividend. Yinson declared an interim DPS of 4 sen which implies payout ratio of 42%. This was similar to the DPS paid in 2QFY19.

• Outlook. In the near term, we expect earnings to pick up on structural earnings growth from FPSO Helang and FPSO Abigail Joseph which may commence charter in 2HFY20 and 1HFY21 respectively. Long term outlook is also bright as we expect Yinson to finalise the FPSO Marlim and FPSO Parque contract from Petrobras soon which may triple its orderbook to US$17bn.

• Our call. Maintain our BUY call with unchanged SOP-derived TP of RM7.70 which implies 33x FY20F PE before it drops to 22x for FY21F (Table 2). We see further upside to the stock price as it offers vast growth potential amidst rising FPSO demand and limited competition.

Source: BIMB Securities Research - 26 Sept 2019