Investment Highlights

• Most of plantation results were within consensus or our estimates. The exceptions were Genting Plantations (GenP) and Sime Darby Plantation (SDP). Apart from softer palm product prices, GenP was affected by poor visitorship at the Premium Outlets and weak demand for biodiesel and refined palm products in 2QFY20. SDP’s downstream EBIT plunged by 73.0% QoQ to RM23.0mil in 2Q2020 as Covid-19 affected sales volume of differentiated products.

• Plantation upstream EBIT was 15% to 55% lower in 2Q2020 vs. 1Q2020. Dragged by weaker palm product prices, upstream earnings of most of the plantation companies fell by 15% to 55% QoQ in 2Q2020. According to the MPOB, average CPO price was RM2,262/tonne in 2Q2020, 16.3% lower than the average of RM2,703/tonne in 1Q2020.

• Exceptions were FGV Holdings and IOI Corporation, which recorded higher upstream earnings QoQ in 2Q2020. The QoQ rise in IOI’s CPO output of 37.0% in 2Q2020 compensated the 16.3% QoQ drop in CPO price. IOI’s plantation EBIT climbed by 41.6% QoQ to RM234.2mil in 2Q2020. As for FGV, the group’s FFB production surged by 67.0% QoQ in 2Q2020. This led to a turnaround in FGV’s plantation pre-tax profit in 2Q2020.

• Industry FFB production grew QoQ in 2Q2020. Cushioning the impact of weaker palm product prices was the QoQ climb in FFB production in 2Q2020. All of the plantation companies in our coverage recorded quarterly increases in FFB output in 2Q2020 although for most of them, the magnitude of the output improvement was smaller than the fall in CPO price. In our universe, FGV Holdings recorded the highest QoQ expansion of 67.0% in FFB production in 2Q2020 while TSH Resources registered the smallest improvement of 5.5%.

• Comparing 1H2020 against 1H2019, upstream earnings grew more than 30%. This was driven mainly by higher palm product prices. Higher CPO price helped offset the YoY fall in CPO production in 1H2020. According to the MPOB, average CPO price rose by 24.4% to RM2,482/tonne in 1H2020 from RM1,996/tonne in 1H2019. Most planters registered a decline in FFB production in 1H2020 due to the lagged impact of the drought and haze, which took place in Indonesia and Malaysia in 3Q2019. FGV’s FFB yields also suffered in 1H2020 as the group reduced fertiliser application in 2019. FGV only applied 65% of its full-year fertiliser requirements in FY19.

• Downstream earnings were surprisingly decent in 2Q2020. In spite of the Covid-19 lockdown in various countries, the downstream earnings of IOI and KL Kepong (KLK) were surprisingly decent in 2Q2020. This was partly supported by unrealised fair value gains on derivative contracts. Although IOI’s manufacturing EBIT shrank by 16.4% QoQ to RM99.6mil in 2Q2020, this was due to smaller fair value gains on derivative contracts.

• EBIT margin of KLK’s manufacturing division (mainly oleochemicals) edged up to 5.7% in 2Q2020 from 5.5% in 1Q2020 while IOI’s manufacturing EBIT margin (mainly refining and oleochemicals) (including associates and fair value changes) fell to 5.0% from 6.1%. On the other hand, SDP’s downstream EBIT margin (bulk products, trading activities and differentiated products) plunged to 1.5% in 2Q2020 from 7.0% in 1Q2020.

• Maintain NEUTRAL. We are NEUTRAL on the plantation sector as CPO prices are expected to be capped by rising stockpiles. Plantation companies are expected to record higher FFB production in the coming months due to seasonal factors. Currently, we are assuming an average CPO price of RM2,300/tonne for Malaysia in 2020F (2019 MPOB spot price: RM2,119/tonne).

Source: AmInvest Research - 2 Sept 2020