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Author: kltrader   |   Latest post: Mon, 14 Oct 2019, 5:17 PM

 

Plantations - 2Q 2019 Earning Wrap-up: Hiccup in Upstream Business

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  • Overall, 2Q19 performance for companies under our coverage saw another round of earnings downgrade, coming below expectations with one (IOI) inline.
  • Aggregate FFB production dropped 3.2% qoq but increased 3.9% yoy (+6.8% yoy YTD)
  • We expect to see qoq margins improvement in the next 3Q19 earnings on higher expected palm products price realized vs. 2Q19 and further improvement in FFB production.
  • We forecast CPO price for Q3 2019 to trade within a range of RM1,900/MT – RM2,200/MT against RM1,901/MT – RM2,052/MT realized in Q2 2019.
  • Maintain Underweight the sector against likely scenario that lower ASP of PO would continue to be a risk to planters’ earnings with average CPO forecast for 2019 of RM2,050/MT and RM2,200/MT for 2020.

Another disappointment: Earnings was murky

As expected 2Q results came in weaker with all companies under our coverage missed our earnings target except for IOI. The weak ASP of palm products has negatively impacted revenue generation capability of plantation company, hence squeezing the margin especially upstream operations. Pure plantation companies were affected more than companies that are more diversified (upstream and downstream), benefiting from low raw material costs. Key factors of the unimpressive earnings results are: 1) weak ASP of palm products, 2) low FFB and CPO production; 3) low palm products sales volume; 4) higher production costs; and 5) higher depreciation and finance costs.

Changed in earnings forecast

After fine-tuning our forecast, our FY19 and FY20 net profit forecast for the sector is reduced by average 56% and 35% respectively. The reduction is due to our revised PO price, costs and downstream margins on stronger-than-expected competition in valueadd products, i.e. oleo-chemical and speciality oil & fats. As we have revised our sector avg. CPO price assumption for 2019 and 2020 to RM2,050/MT and RM2,200/MT respectively in previous sector report (refer report dated 5 July 2019), we lower our CPO price assumption for companies under our coverage by 7%-10% from earlier forecast of RM2,200/MT to RM2,280/MT for 2019 and RM2,300/MT to RM2,400/MT for 2020. As such, earnings growth is expected to be negative in 2019, averaging a decline of c. 17%.

Outlook: what to expect in Q3 2019

We are of the view that earnings upside this year is limited by high operational costs and suppressed profit margin on weaker ASP for palm products realized and lowerthan-expected sales volume. We expect to see margins improvement in the next 3Q19 earnings result on higher expected palm products price realized vs. 2Q19 and further improvement in FFB production.

Stay UNDERWEIGHT; PO price remains key risk to planters’

Maintain Underweight the sector against likely scenario that a lower ASP of PO would continue to be a risk to planters’ earnings with average CPO forecast for 2019 of RM2,050/MT and RM2,200/MT for 2020.

Source: BIMB Securities Research - 5 Sept 2019

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