• Reuters reported that Sabah will temporarily suspend palm oil operations in Tawau, Lahad Datu and Kinabatangan after seven plantation workers tested positive for Covid-19.

• All palm oil operations in the three districts will be suspended from 25 to 31 March. Palm oil processing factories will halt operations from 27 to 31 March.

• We expect the impact of the seven-day closure in Sabah to be marginally negative for the plantation companies in our coverage. If the suspension in the Sabah operations is extended by another week or if Indonesia implements a similar suspension in plantation operations, then the impact on industry FFB production growth would be significant.

• We estimate the impact of the suspension on the FFB production of the companies in our coverage to be between 0.2% and 1.3%.

• In our stock universe, IOI Corporation has the largest exposure to Sabah. We estimate that about 68.9% or 121,419ha of IOI Corporation’s planted areas in Sabah. Although IOI has oil palm estates in Indonesia, contribution from Indonesia is small. We believe that Indonesia accounts for less than 10% of IOI’s FFB production.

• Sime Darby Plantation has the least exposure to Sabah in our stock universe. We estimate that 9% or 53,676ha of the group’s planted areas are in Sabah.

• According to the group’s December 2018 Annual Report, Sime Darby Plantation has planted areas of about 300,730ha in Malaysia, 201,073ha in Indonesia and 91,081ha in Papua New Guinea.

• Currently, we have assumed that the plantation companies in our coverage would record an FFB production growth of -0.2% to 10% in FY20F. We have forecast that Genting Plantations would register the highest increase in FFB production of 10% in our coverage underpinned by a rise in mature areas of 2,000ha and a recovery in FFB yields. IOI is estimated to register a 0.2% decline in FFB production in FY20F as 11,000ha of ageing oil palm estates are taken out for replanting.

• Overall, we think the temporary suspension in estate operations in Sabah is marginally negative. On a positive note, the temporary reduction in palm supply may help support CPO prices in the short term. We maintain an UNDERWEIGHT on the plantation sector.

Source: AmInvest Research - 25 Mar 2020