Investment Highlights

• A mixed bag of results. Two plantation companies performed below market expectations in their 9MFY20 results while three companies exceeded consensus estimates. Another two companies were in line with market expectations. Genting Plantations (GenP), FGV Holdings and Sime Darby Plantation (SDP) were above market expectations. FGV recorded a double-digit QoQ growth in FFB production in 3Q2020 while SDP’s downstream earnings recovered. On the other hand, IOI and KLK were hit by a fall in refining and oleochemical profit margins resulting from an increase in the cost of feedstock.

• Purer companies performed better than their integrated peers. Purer plantation companies had higher exposure to CPO prices in 3Q2020 while the downstream divisions of the integrated companies were affected by the higher cost of raw materials. The swift surge in CPO prices in 3Q2020 meant that the integrated companies were unable to increase the selling prices of their downstream products immediately.

• For instance, GenP’s EBITDA climbed by 26.4% YoY to RM378.6mil in 9MFY20. IJM Plantations’ (IJMP) gross profit surged to RM65.9mil in 1HFY21 from RM2.4mil in 1HFY20. On the other hand, IOI’s core net profit (ex-forex changes) fell by 12.4% YoY in 1QFY21 while KLK’s core net profit (ex-disposal gains of RM105.8mil) in FY20 was flat YoY (partly due to a higher effective tax rate).

• Most plantation companies recorded higher FFB production in 3Q2020 vs. 2Q2020. The plantation companies under our coverage registered QoQ increases in FFB production of 1.5% to 19.0% in 3Q2020. Exceptions were KLK, IJMP and SDP, which experienced QoQ declines in their FFB output in 3Q2020. We attribute the QoQ falls in FFB production in 3Q2020 to weak output in Indonesia. According to several industry players, CPO production in Indonesia would achieve its highest level in 4Q2020 instead of 3Q2020. The strongest QoQ increases in FFB production in 3Q2020 were registered by FGV Holdings (13.2%) and TH Plantations (19.0%).

• Sizeable gap between the companies’ realised CPO prices (group basis including Indonesia) and MPOB spot prices in 3Q2020. Plantation companies in our coverage achieved average CPO prices of RM2,389/tonne to RM2,579/tonne in 3Q2020. These were RM174/tonne to RM364/tonne lower than the MPOB spot price of RM2,753/tonne in 3Q2020.

• We attribute the wide discrepancy to sales of CPO locked in earlier at lower prices and the large discount between the prices of CPO in Malaysia and Indonesia. According to reports, CPO price in Indonesia has priced in a potential export levy of more than US$100/tonne even though the hike in export levy has not been implemented yet.

• Erosion in downstream margins in 3Q2020 due to a higher cost of feedstock. IOI’s manufacturing division (refining and oleochemicals) achieved a small EBIT margin (including fair value changes in derivatives and associates) of 1.7% in 3Q2020 vs. 8.0% in 3Q2019 and 5.0% in 2Q2020. KLK’s plantation division (upstream and palm refining) recorded a lower EBIT QoQ in 3Q2020, which we partly attribute to weaker refining margins. SDP was the opposite. SDP’s downstream unit (bulk products, specialised products and trading) suffered during the Covid-19 lockdown in 2Q2020 and then recovered in 3Q2020. SDP’s downstream division registered a higher EBIT margin of 5.4% in 3Q2020 vs. 1.5% in 2Q2020.

• Maintain NEUTRAL. We have raised our average CPO price assumption to RM2,500/tonne for 2021F from RM2,400/tonne previously. In spite of this, we are NEUTRAL on the plantation sector. Industry demand for palm products may ease in the short-term as CPO prices are currently close to soybean oil prices. In addition, discretionary demand for palm biodiesel may fall as CPO is more expensive than gasoil.

Source: AmInvest Research - 2 Dec 2020