Investment Highlights

• 4Q2018 was weak. All financial results of the plantation companies were weak in 4Q2018 due to the plunge in CPO price. Only Kuala Lumpur Kepong (KLK) met our forecast. The fall in CPO price offset the positive impact of the QoQ surge in FFB production and lower fertiliser application in 4Q2018. According to the MPOB, average CPO price was RM1,902/tonne in 4Q2018, which was 13.2% lower than the average price of RM2,192/tonne in 3Q2018.

• A few companies were in the red. Plantation companies which recorded losses in 3Q and 4Q2018 were FGV Holdings, TH Plantations (THP) and IJM Plantations (IJMP). Apart from a weaker CPO price, FGV was hit by impairments and write-offs. For the other two planters, their production cost per tonne was close to the CPO price. THP achieved average CPO prices of RM2,090/tonne in 3Q2018 and RM1,821/tonne in 4Q2018. In Malaysia, IJMP recorded average CPO prices of RM2,228/tonne in 3Q2018 and RM1,928/tonne in 4Q2018.

• FFB production in Sabah is recovering. Plantation companies in our stock universe registered FFB output growth of -1.2% to 20.8% in 2018. Comparing 4Q2018 against 3Q2018, FFB production growth of the companies ranged from -17.8% to 37.8%. On a quarterly basis, three companies achieved increases in FFB output, which exceeded 20% each in 4Q2018. These companies have sizeable plantation operations in Sabah.

• We believe that after a weak 9M2018, FFB yields in Sabah are recovering. This is reflected by Hap Seng Plantations’ FFB production which climbed by 11.6% YoY in 4Q2018 and 16.5% YoY in January 2019. Hap Seng Plantations only has operations in Sabah. There is a possibility that FFB production in Indonesia may achieve a slower rate of increase in 2019F after the robust productivity in 2017 and 2018.

• Production cost per tonne rose in 2018. This was mainly due to lower palm kernel credits, higher wages and increase in transportation and fertiliser costs. For instance, Genting Plantations’ (GenP) production cost (all-in) increased to RM1,700/tonne in FY18 from RM1,600/tonne in FY17 while FGV Holding’s production cost (ex-mill) rose to RM1,737/tonne in FY18 from RM1,592/tonne in FY17. GenP recorded an FFB production growth of 10.6% in FY18 while FGV achieved a 1.2% decline in FFB output.

• Downstream earnings were mixed in 4Q2018. Downstream units of Sime Darby Plantation and IOI Corporationregistered 53.1% to 76.9% YoY increases in EBIT respectively in 4Q2018 as margins recovered on the back of a lower cost of feedstock. On the other hand, KL Kepong’s downstream EBIT slid by 28.7% YoY in 4Q2018 due to downward pressure on selling prices. Each of the companies is involved in different segments of the downstream chain, thus the difference in margin and profitability trends.

• UNDERWEIGHT. We believe that valuations of plantation companies are stretched as they have already factored in an average CPO price of RM2,300/tonne for 2019F. So far this year, average CPO price (MDEX prices) has been RM2,176/tonne. This is 11.8% weaker than the average price (MPOB price) of RM2,467/tonne achieved in 1Q2018.

Source: AmInvest Research - 4 Mar 2019