Investment Highlights

• A mixed set of results in 1Q2021 in spite of high CPO prices. Net profit growth of the companies in our coverage ranged from -27.4% to 639.7% YoY in 1Q2021. Sime Darby Plantations (SDP) registered the highest net profit growth in our stock universe while IOI Corporation’s (IOI) core net profit fell by 27.4%. Two companies exceeded our expectations, three were within estimates while two companies fell short of our forecasts. Genting Plantations (GenP) was affected by losses in the downstream division while FGV was dragged by a 16% drop in sales volume of CPO.

• Mostly higher downstream earnings in 1Q2021. We believe that Kuala Lumpur Kepong (KLK) and SDP benefited from timely purchases of feedstock and positive palm refining margins in Indonesia. The exception to this was IOI, which does not have any palm refinery in Indonesia. The cost of CPO in Indonesia has declined due to the country’s CPO export tax and levy, which amounted to US$348/tonne (RM1,430/tonne) in total in March 2021.

• Downstream EBIT margins were still positive in 1Q2021 in spite of high feedstock costs. IOI’s manufacturing (refining and olechemicals) EBIT margin (excluding fair value changes and associates) was lower at 2.3% in 1Q2021 against 2.7% in 1Q2020. On the other hand, EBIT margin of KLK’s manufacturing division (oleochemicals and gloves) was 7.9% in 1Q2021 vs. 5.5% in 1Q2020. SDP’s downstream division (trading, bulk products and differentiated products) registered a marginally weaker EBIT margin of 3.4% in 1Q2021 vs. 3.8% in 1Q2020.

• Upstream operations were hit by CPO export tax and levy in Indonesia. The CPO export tax and levy in Indonesia resulted in a price difference of RM900/tonne to RM1,100/tonne between Malaysia and Indonesia in 1Q2021. This resulted in CPO price in Indonesia being only 10% to 17% YoY higher in 1Q2021. Essentially, Indonesian upstream companies did not enjoy the surge in CPO prices in 1Q2021 as much as the purer Malaysian planters. TSH Resources said that the Indonesia CPO export tax and levy affected its earnings by RM42.3mil in 1QFY21. For IJM Plantations (IJMP), Indonesia’s CPO export tax and levy resulted in declines in revenue of RM44.9mil in 4QFY21 vs. 4QFY20 and RM52.3mil in FYE3/21 vs. FYE3/20.

• FFB production growth in Malaysia was muted in 1Q2021. FFB production in Malaysia was affected by the wet weather in 1Q2021. FFB output of SDP’s Malaysia division slid by 2% YoY in 1Q2021. IJMP’s Malaysia unit recorded a 26.2% YoY fall in FFB production in 1Q2021. FGV’s FFB production improved by 4.3% YoY in 1Q2021.

• Strong improvement in FFB output in Indonesia in 1Q2021 in certain locations. Unlike their Malaysian peers, FFB production of several Singapore-listed Indonesian planters was robust in 1Q2021. We think that certain locations e.g. Sumatra and Central Kalimantan performed better than others. SDP’s FFB production in Indonesia surged by 20% YoY in 1QFY21. Golden Agri Resources recorded a 32% YoY jump in upstream palm output in 1Q2021 as FFB yield surged by 22% to 5.3 tonnes/ha. Bumitama Agri (BAL) recorded a 26.4% YoY increase in FFB production in 1Q2021 while First Resources registered an 11.3% expansion. On a negative note, Astra Agro Lestari’s FFB production fell by 3.3% YoY in 1Q2021.

• Maintain NEUTRAL. We think that CPO prices would soften as the industry enters the peak production period in 2Q2021. Also as mentioned previously, at CPO prices of about RM4,000/tonne, we reckon that there is more downside than upside. Nevertheless, for investors who would like exposure to the palm oil sector in Malaysia, we recommend KLK for its young oil palm trees in Indonesia and acquisitive growth.

Source: AmInvest Research - 3 Jun 2021