• Plantation companies will be releasing their results in the coming weeks.
• Comparing 2Q2020 against 1Q2020, we believe that most plantation companies would be recording lower earnings due to weaker palm product prices.
• Comparing 1H2020 against 1H2019, we reckon that most planters would be registering stronger upstream earnings as higher CPO prices compensated for unexciting palm production. Average MPOB spot price rose by 24.4% to RM2,482/tonne in 1H2020 from RM1,996/tonne in 1H2019. FFB production of the companies in our coverage dropped by 2% to 14% YoY in 1H2020 with the exceptions of IJM Plantations and TSH Resources (see Exhibit 1).
• On a quarterly basis, upstream and downstream earnings are expected to be softer in 2Q2020. Although FFB output was higher QoQ in 2Q2020, we believe that for most companies, this would not be enough to offset the quarterly drop in palm product prices.
• According to the MPOB, average spot price was RM2,262/tonne in 2Q2020. This was 16.3% lower than the average of RM2,703/tonne in 1Q2020. Most companies in our coverage recorded FFB output growth, which was below 16% QoQ in 2Q2020.
• The exceptions were IOI Corporation, FGV Holdings and TH Plantations. IOI’s FFB production expanded by 37.0% in 2Q2020 vs. 1Q2020 while FGV’s FFB output surged by 67.0%. TH Plantations’ FFB production climbed by 32.4% QoQ in 2Q2020 (see Exhibit 1).
• In terms of production cost per tonne, we believe that this would decline QoQ in 2Q2020, underpinned by a higher volume of palm production. However, upstream operating profit margins would still be weak due to the drop in selling prices.
• We believe that downstream earnings (refining and oleochemicals) would decline QoQ in 2Q2020. The lockdown in economic activities resulting from Covid-19 in March and April had resulted in a fall in demand and logistics issues at the destination countries.
• As such, we believe that downstream margins would be affected in 2Q2020. Companies with downstream activities include IOI, Kuala Lumpur Kepong, Sime Darby Plantation and FGV Holdings.
• We are NEUTRAL on the plantation sector. We are keeping our average CPO price assumption of RM2,300/tonne for 2020E. For investors who would like exposure to the sector, our pick is KLK for its young oil palm trees in Indonesia and a clean balance sheet.

Source: AmInvest Research - 7 Aug 2020