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Author: kltrader   |   Latest post: Mon, 13 Jan 2020, 5:44 PM

 

Plantations - 3Q2019 Earnings Wrap-up: Light at the End of the Tunnel

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  • Overall, 3Q2019 performance for companies under our coverage were mixed with 5 coming in below our expectations, 2 above and 3 within our expectations.
  • During the period, we made earnings upgrade to SOP and SIME Plant (imputing lower costs of sales and operating expenses), and downgraded earnings of FGV, GENP and HAPL (on higher depreciation, finance costs and effective tax rate).
  • We see potential upside to plantation’s margin in the up-coming 4Q2019 earnings result season given higher expected average selling price of PO with a more realistic production expectation.
  • We forecast CPO price in 4Q2019 to trade within a range of RM2,000/MT and RM2,700/MT against RM2,000/MT and RM1,718/MT realized in 4Q2018.
  • Maintain Neutral on the sector with likely scenario that a higher ASP of PO is insufficient to compensate for the expected weak production and higher costs, with average CPO forecast for 2020 of RM2,380/MT.

Fewer disappointments, more inline and above

With the 3Q19 results season having recently concluded, out of 10 stocks under our coverage, 3 companies were within expectation with 2 above and 5 came in below expectation. Out of 5 companies that reported disappointing result, FGV made a bigger losses due to losses in sugar business and recognition of impairments both in plantation and sugar business. While the other four, HAPL, GENP, TSH and THP’s poorer performance was due to lower ASP of PO and cost factors owing to the higher operational, depreciation and finance costs as well as effective tax rate.

Changed in earnings forecast

We have revised our sector average CPO price assumption for 2020 to RM2,380/MT (RM2,200/MT previously) in our previous sector report (refer report dated 11 Nov 2019). Nonetheless, we maintain our CPO’s ASP realised assumption for companies under our coverage, given the price assumption is still within our sector’s average CPO price forecast of RM2,380/MT, i.e. varying between RM2,300/MT to RM2,400/MT. Nonetheless, our earnings revisions were done more on cost factors owing to operational costs, depreciation and finance costs as well as effective tax rate.

Outlook: what to expect in 4Q2019

We expect to see margins expansion in upstream segment in Q4’s earnings result given higher ASP realized of palm products vs. 3Q19/4Q18, and improvement in production. As of YTD Oct2019, Malaysia’s CPO production has met our expectation, making up 85% of our full year forecast of 19.99m tonnes, whilst CPO price (local delivery) on Nov 22, was traded at RM2,584/MT. Variances in earnings forecast would be due to lowerthan-expected production, ASP realised of palm products and higher-than-expected costs.

Stay NEUTRAL

Maintain Neutral on the sector with likely scenario that a higher ASP of palm oil is insufficient to compensate for the expected weak production and higher costs; with estimated average CPO forecast for 2020 of RM2,380/MT. Risk factor would include 1) lower-than expected demand due to changes in government policies of importing countries and, 2) weakening of crude oil prices.

Source: BIMB Securities Research - 2 Dec 2019

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