Investment Highlights

• 3Q2021 results were impressive. Similar to 2Q2021, almost all of the companies in our stock universe exceeded our expectations and consensus estimates as operating margins beat forecasts. Sector net profit surged by more than 30% YoY in 9M2021 on the back of robust palm product prices.

• Average realised CPO prices improved in 3Q2021. Companies under our coverage realised average CPO prices of RM3,502/tonne to RM4,244/tonne in 3Q2021 compared with RM2,318/tonne to RM2,645/tonne in 3Q2020. Some of the realised prices were sharply below MPOB average spot price of RM4,413/tonne in 3Q2021 as the companies carried out forward sales of CPO, which were locked in at lower prices. Also, some of the planters have sizeable operations in Indonesia, which has lower CPO price compared to Malaysia.

• Price difference between CPO in Indonesia and Malaysia narrowed in 3Q2021 vs. 2Q2021. Based on IJM Plantations’ (IJMP) realised prices, the disparity between CPO in Malaysia and Indonesia declined to RM881/tonne in 3Q2021 from RM955/tonne in 2Q2021. IJMP’s average CPO price in Indonesia was RM3,363/tonne in 3Q2021 vs. RM2,992/tonne in 2Q2021. We believe that the price disparity shrank in 3Q2021 due to the reduction in Indonesia’s CPO export tax and levy. Indonesia’s CPO export tax and levy amounted to an average of US$300/tonne in total in 3Q2021 compared with US$403/tonne in 2Q2021.

• FFB production improved QoQ in 3Q2021. In line with seasonal production patterns, most of the companies in our coverage registered higher FFB production in 3Q2021 compared to 2Q2021. Bucking the upward trend were Genting Plantations (GenP), TSH Resources and Sime Darby Plantation (SDP). We attribute the QoQ declines in their FFB output in 3Q2021 to softer FFB yields in Indonesia after a bumper harvest in 2Q2021. The negative trend was also reflected in the FFB production of a few SGD-listed Indonesian planters. Comparing 9M2021 against 9M2020 however, the FFB production growth of most SGX-listed Indonesian planters was stronger than that of their Malaysian peers.

• Production cost per tonne of companies were mixed YoY in 9M2021. GenP’s all-in cost of CPO production was RM1,895/tonne in 9M2021 vs. RM2,010/tonne in 9M2020. On the other hand, SDP’s cost of production to customers was RM1,800/tonne in 9M2021 against RM1,600/tonne in 9M2020.

• Downstream finally facing the impact of higher raw material costs. Kuala Lumpur Kepong’s (KLK) manufacturing EBIT (oleochemicals and gloves) margin shrank to 6.2% (ex-RM29.1mil impairment) in 3Q2021 from 7.8% in 2Q2021. We reckon that this was due to higher raw materials, energy and shipping costs. SDP’s downstream (differentiated, bulk products and trading) EBIT margin plunged to 0.3% in 3Q2021 from 7.8% in 2Q2021 dragged by fair value losses on commodity contracts of RM70.0mil. IOI’s manufacturing division (oleochemicals) (including fair value changes and associates) recorded a smaller EBIT margin of 1.3% in 3Q2021 vs. 12.2% in 2Q2021 due to fair value losses of RM108.7mil on commodity forward contracts. IOI’s manufacturing EBIT tumbled to RM46.1mil in 3Q2021 from RM409.8mil in 2Q2021.

• NEUTRAL. We believe that plantation earnings would decline in 2022F dragged by weaker CPO prices and higher fertiliser costs. The tax on overseas dividend income may also affect the earnings of some of the plantation companies. Also, we reckon that ESG concerns would continue affecting the valuations of the sector. We have assumed an average CPO price of RM3,000/tonne in 2022F vs. RM3,500/tonne in 2021E. We do not have any BUY recommendation in our coverage.

Source: AmInvest Research - 1 Dec 2021