Investment Highlights

• 2Q2021 results were sterling. Almost all of the companies in our coverage beat our earnings forecasts and consensus estimates. The exception was IOI Corporation, which met our expectations but fell short of consensus estimates. IOI was affected by erosions in manufacturing EBIT margins in 2HFYE6/21.

• 2Q2021 was better than 1Q2021. The companies in our coverage posted core net profit growth of more than 30% QoQ in 2Q2021. These were underpinned by higher FFB production and an increase in palm product prices. Group FFB production growth in our stock universe ranged from 0.9% to 42.5% QoQ in 2Q2021. FGV recorded the highest QoQ increase of 42.5% in FFB output in 2Q2021. Comparing 1H2021 against 1H2020 however, FGV’s FFB production fell by 5.2% due to the wet weather in 1Q and shortage of estate workers.

• Average price of CPO realised in Indonesia rose in 2Q2021 vs. 1Q2021. TSH’s average CPO price realised was RM3,441/tonne in 2Q2021 compared with RM3,010/tonne in 1Q2021. More than 90% of TSH’s FFB production are from Indonesia. Sime Darby Plantation’s (SDP) average CPO price realised in Indonesia was RM3,109/tonne in 2Q2021 vs. RM2,886/tonne in 1Q2021. In Malaysia, the average MPOB spot price was RM4,208/tonne in 2Q2021 compared with RM3,895/tonne in 1Q2021.

• Realised prices in Indonesia could have been higher in 2Q2021 if not for the CPO export tax and levy. On average, the CPO export tax and levy amounted to US$403/tonne (RM1,671/tonne) in 2Q2021 compared to US$332/tonne (RM1,376/tonne) in 1Q2021. Looking ahead to 3Q2021, we believe that the realised prices of Indonesian planters would improve as Indonesia has reduced the CPO export tax and levy in July and August. The CPO export tax and levy amounted to US$291/tonne in total in July and US$268/tonne in August vs. US$438/tonne in June. However for September, Indonesia has raised the CPO export tax to US$166/tonne but kept the CPO export levy at US$175/tonne.

• FFB production was strong in Indonesia (depending on locations) but weak in Malaysia in 1H2021. SDP’s FFB production grew by 19% YoY in 1HFY21. Also, most of the SGX-listed Indonesian planters recorded robust FFB output growth in 1H2021. Bumitama Agri’s FFB production growth was 27.0% YoY in 1H2021 while Golden Agri Resources registered a 26.0% (including acquisitions) increase in FFB output. On the other hand, Indofood Agri Resources’ FFB slid by 3.0% YoY in 1H2021. Astra Agro Lestari’s FFB production shrank by 2.3% YoY in 1H2021 due to a 16.9% drop in Sulawesi and 6.0% fall in Kalimantan.

• Downstream earnings mostly improved QoQ in 2Q2021. SDP’s downstream (bulk products, differentiated products and trading) EBIT rose by 36.4% QoQ to RM146.0mil in 2Q2021 underpinned by higher refining margins in Indonesia. SDP’s downstream EBIT margin expanded to 7.8% in 2Q2021 from 6.6% in 1Q2021. On the other hand, IOI’s manufacturing EBIT (mainly refining and oleochemicals) (excluding associates and fair value changes) only inched up by 1.9% to RM65.8mil in 2Q2021from RM64.6mil in 1Q2021. IOI’s manufacturing EBIT margin eased to 2.0% in 2Q2021 from 2.3% in 1Q2021.

• NEUTRAL. We believe that ESG concerns would continue to affect the share price performances of the palm oil sector in Malaysia. Also, we reckon that there is more downside than upside at CPO prices of more than RM4,500/tonne. Hence, we are keeping our NEUTRAL stance on the plantation sector. Our only BUY is SDP. We have a fair value of RM4.88/share for SDP based on an FY22F PE of 22.0x.

Source: AmInvest Research - 3 Sept 2021