Investment Highlights

• 2020 ended well. Overall, most of the plantation companies in our coverage performed well in 4Q2020 as palm product prices surged. The companies in our stock universe (those with December year-end) recorded net profit growth ofmore than 75.0% in FY20 as average CPO price realised climbed by more than 20.0%. Four companies met consensus while two companies (Kuala Lumpur Kepong and Sime Darby Plantation) exceeded market expectations. FGV Holdings fell short of estimates as its 4QFY20 results were affected by asset impairments of RM180.6mil, commodity losses of RM49.2mil and a 22.6% QoQ drop in FFB production.

• Most of the integrated companies performed just as well as purer planters in FY20. Net profit growth of the purer planters ranged from 75.3% to 97.8% in FY20. In comparison, Sime Darby Plantation (SDP), which is an integrated company, registered a net profit growth of more than 100%. In spite of the rise in feedstock costs, the downstream division of the integrated companies did well in 4Q2020.

• Mostly, YoY expansion in downstream EBIT margins in 4Q2020 in spite of the rise in raw material costs. We attribute this to trading gains and higher selling prices of downstream products. Kuala Lumpur Kepong’s (KLK) manufacturing (oleochemicals and gloves) EBIT margin rose to 6.2% in 4Q2020 from 4.8% in 4Q2019 while SDP’s downstream EBIT (trading, bulk products and differentiated products) margin jumped to 12.0% from 4.1%. On the other hand, IOI Corporation’s (IOI) manufacturing (refining and oleochemicals) EBIT margin slid to 0.9% in 4Q2020 from 1.6% in 4Q2019.

• Healthy palm prices compensated for weak FFB production in FY20. FFB production of the plantation companies in our coverage fell by 1.2% to 5.0% in FY20. This was due to a shortage of foreign labour and lagged impact of the drought and haze, which took place in 3QFY19. An industry player said that the dominant factor causing the fall in FFB production in 2020 was the drought. Exceptions were TSH Resources and IJM Plantations (IJMP), which managed to eke out output improvements of 1.4% and 1.6% respectively in 2020. We attribute this to the companies’ estates in East Kalimantan, which were not affected by the haze in 3Q2019.

• Higher FFB output in FY21F. For now, most of the plantation companies in our stock universe are guiding zero to singledigit growth in FFB production in FY21F. IOI’s FFB production is expected to be flat in FY21F as the group is replanting some of its ageing oil palm trees. Most of the other plantation companies are expecting a recovery in FFB yields, which would improve FFB output in FY21F. In our coverage, Genting Plantations (GenP) is expected to record the highest FFB production growth of 8.0% in FY21F while IOI is envisaged to register the lowest growth of 0%.

• Forward sales brought down realised selling prices of some of the planters. This was similar to 3Q2020. Average realised prices of the planters in our coverage ranged from RM2,589/tonne to RM3,200/tonne in 4Q2020. These were 4.2% to 22.5% lower than the average MPOB spot price of RM3,341/tonne in 4Q2020. We believe that the large disparity wasdue to forward sales of CPO at lower prices and weak price of CPO in Indonesia. Due to Indonesia’s CPO export tax and levy, the price of CPO in the country is almost RM1,000/tonne cheaper than Malaysia’s currently.

• Maintain NEUTRAL. We have raised our average CPO price assumption to RM3,000/tonne for 2021F from RM2,500/tonne previously. In spite of this, we are NEUTRAL on the plantation sector. We believe that ESG concerns would drag on the sector’s valuations in Malaysia. Also at CPO price of more than RM3,500/tonne, we reckon that there is more downside than upside. Additionally, a recovery in CPO production from 2Q2021 onwards may exert downward pressure on CPO prices.

Source: AmInvest Research - 3 Mar 2021