Investment Highlights

• Pure planters performed better than integrated players in 4Q2019. All of the large integrated planters performed below our expectations. Among the pure plantation companies, IJM Plantations, Genting Plantations and TSH Resources met consensus while TH Plantations was below estimates due to an RM186mil impairment on assets. Almost all of the planters in our stock universe recorded fair value losses on commodity futures contracts in FY19.

• The QoQ increase in plantation earnings in 4Q2019 could not offset the fall in manufacturing or downstream earnings. The integrated plantation companies were affected by two things in 4Q2019. First, they locked in to sell CPO when CPO prices were surging. This resulted in unrealised fair value losses on derivative instruments. Second, due to the higher cost of palm products, the downstream units of the companies faced erosions in EBIT margin. In our coverage, Sime Darby Plantation recorded the largest unrealised fair value loss of RM177mil on commodity and foreign currency forward contracts in 4Q2019 while TSH Resources recorded the smallest fair value loss of RM4.7mil on commodity contracts.

• Upstream earnings could have been higher in 4Q2019 if not for the QoQ fall in FFB production. Plantation EBIT of the companies in our stock universe rose by 20% to more than 100% QoQ in 4Q2019 (ex-Sime Darby Plantation and TH Plantations). We believe that the earnings recovery of some of the companies could have been stronger in 4Q2019 if FFB production rose instead of declined.

• FFB production of the companies in our coverage slid by 0% to 19% QoQ in 4Q2019. Exceptions were Genting Plantations (GenP) and IJMP, which recorded a 6.2% and 16.8% QoQ surge in FFB output respectively in 4Q2019. Both companies have sizeable estate operations in Kalimantan. FGV’s FFB production fell by 18.4% QoQ in 4Q2019 while IOI registered a small QoQ decline of 0.4%. We attribute the QoQ fall in industry FFB production in 4Q2019 to the drought and haze in Malaysia and Indonesia, which took place in 3Q2019.

• Average realised CPO price was RM200 to RM340/tonne below MPOB physical delivery price. Due to the forward sales, the average realised selling price of the integrated planters was RM200/tonne to RM340/tonne lower than the MPOB physical delivery price of RM2,470/tonne in 4Q2019. Additionally, some companies have operations in Indonesia where the CPO price was still lower than Malaysia in 4Q2019. This also contributed to the wide disparity between the realised price of the plantation companies and the MPOB physical delivery price in 4Q2019.

• 1Q2020 to be better than 4Q2019. We think that the upstream division of the planters would perform better in 1Q2020 as average CPO price in 1Q2020 is expected to be higher than 4Q2019’s average MPOB price of RM2,470/tonne. Average MDEX CPO price was RM2,818/tonne in 2M2020.

• The performance of the manufacturing or downstream operations of the planters may be mixed in 1Q2020. The integrated players may see smaller or a reversal of 4Q2019’s fair value losses in 1Q2020. However, refining and oleochemical units of the planters may still suffer erosions in EBIT margins due to the high cost of raw materials. Demand for oleochemical products in 1Q2020 may also be affected by the Covid-19 outbreak and slower global economic conditions.

• UNDERWEIGHT. Our average CPO price assumption is RM2,300/tonne for Malaysia in 2020F. Going forward, we believe that any increase in CPO price would be capped by weaker global demand.

Source: AmInvest Research - 4 Mar 2020