Investment Highlights

• 3QFY19 vs. 2QFY19 – mixed set of results. A few planters (IOI Corporation, KL Kepong and TSH Resources) reported QoQ increases in 3Q2019 gross profit or EBITDA while some chalked up results, which were relatively flat (IJM Plantations and Genting Plantations) or worse (FGV Holdings, Sime Darby Plantation and TH Plantations). Those which reported better results benefited from higher FFB production or improved manufacturing earnings in 3Q2019. IJM Plantations and Genting Plantations recorded higher fertiliser and upkeep costs in 3Q2019, which kept a lid on profitability. FGV, Sime Darby Plantation and TH Plantations were hit by asset impairments in 3Q2019.
   
• FFB production of the companies in our coverage climbed by 0.0% to 31.4% in 3Q2019 compared with 2Q2019. IOI Corporation’s FFB output was stagnant QoQ in 3Q2019 while TH Plantations achieved the highest increase of 31.4%. Average CPO price realised was relatively flat QoQ in 3Q2019.
   
• 4Q2019 is expected to be better than 3Q2019 due to a higher selling price. We envisage earnings enhancements in 4Q2019 underpinned by an increase in CPO price. Average MPOB physical delivery price was RM2,104/tonne in October 2019 vs. RM2,014/tonne in 3Q2019. We think that FFB production in Malaysia would be lower or flat in 4Q2019 vs. 3Q2019. Operating profit margins of the planters are envisaged to improve QoQ in 4Q2019 on the back of a higher CPO price and lower application of fertiliser. Fertiliser application is usually minimal in 4Q2019 due to the monsoon season.

• Slower fertiliser application. As at end-Sept 2019, FGV had applied 45% of its full-year fertiliser requirements. Sime Darby Plantation had applied 80% of its full-year fertiliser requirements in Indonesia and 90% in Malaysia as at end-Sept 2019. Genting Plantations had applied 80% of its full-year fertiliser requirements as at end-Sept 2019.

• A few Indonesian planters have reduced their FFB production growth estimates for 2019E. Bumitama Agri (BAL) estimates zero FFB output growth in FY19E vs. the previous guidance of 5% to 8%. BAL’s nucleus FFB output eased by 3.8% YoY in 9MFY19. Indofood Agri’s (IndoAgri) FFB production is expected to fall by low single digit in FY19E compared with the previous guidance of a 5% increase. IndoAgri’s nucleus FFB output slid by 3.0% YoY in 9MFY19. Golden Agri Resources (GGR) anticipates a 3% decline in FFB production in FY19E vs. the previous guidance of a zero increase. GGR’s nucleus FFB output shrank by 7% YoY in 9MFY19. The Indonesian planters are expected to share their FY20F FFB production outlook during the 4QFY19 earnings season in February 2020.

• Outlook for oleochemical may be challenging. Going forward, IOI said that the operating environment for oleochemicals may be challenging due to the global economic slowdown. In 3Q2019, downstream earnings of the planters were mixed. Sime Darby Plantation’s downstream unit (mainly refining) recorded a robust 33.3% QoQ surge in EBIT in 3Q2019 underpinned by strong demand from India for bulk products. IOI’s manufacturing EBIT (refining and oleochemical) improved by 3.3% QoQ to RM109.4mil in 3Q2019 on the back of higher refining margins. EBIT margin edged up to 6.4% in 3Q2019 from 6.3% in 2Q2019. On the other hand, Kuala Lumpur Kepong’s manufacturing EBIT (mainly oleochemical) slid by 5.2% QoQ to RM106.0mil in 3Q2019 dragged by declines in sales volume and selling prices.

• NEUTRAL. We are maintaining our NEUTRAL stance on the plantation sector. Our average CPO price assumptions are RM2,100/tonne for Malaysia in 2019E and RM2,300/tonne for 2020F. Going forward, we believe that any increase in CPO price would be capped by weaker demand from India and China as buyers shift to cheaper vegetable oils.

Source: AmInvest Research - 4 Dec 2019