Investment Highlights

• 2021 – Sterling year for planters. Plantation companies ended 2021 with a flourish, underpinned by robust palm product prices. Comparing 2021 against 2020, the planters recorded core net profit growth of more than 50%. On a quarterly basis, the companies in our stock universe recorded net or gross profit expansion of more than 30% in 4Q2021.

• Strong CPO prices in 2021 supported by a shortfall in production. Average MPOB spot price was RM4,417/tonne in 2021 compared with RM2,765/tonne in 2020. In spite of this, the average realised prices of the companies in our coverage were 19% to 28% lower than the MPOB spot price due to forward sales carried out at weaker prices and the Indonesia price discount. The exception was Hap Seng Plantations (HSP), which enjoyed a high realised price of RM4,416/tonne in FY21 (FY20: RM2,788/tonne) as it sells mainly at spot prices, and it does not have oil palm estates in Indonesia.

• FFB production growth ranged from 1.4% to -10.9% in 2021. FFB output of the companies in our coverage slid by 1.6% to 10.9% in 2021 dragged by a shortage of estate workers in Malaysia and lagged impact of the drought, which took place in 2019. The exceptions were KL Kepong (KLK), which acquired IJM Plantations, and TSH Resources, which has significant Indonesian operations. We believe that most of the planters are suffering a labour shortage of 10% to 30% in Malaysia currently. We think that the foreign workers would probably arrive in Malaysia in 2H2022. Despite the late arrival of the foreign workers, the outlook for FFB production growth in 2022F is positive as the effects of 2019’s drought dissipates. Malaysia’s CPO output rose by 11.3% YoY in January 2022. IOI Corporation’s FFB production improved by 14.8% YoY in January 2022.

• Production cost per tonne rose in 2021 on lower output and higher cost of wages. Sime Darby Plantation’s (SDP) cost of production to customers rose to RM1,860/tonne in FY21 from RM1,650/tonne in FY20. Genting Plantations’ (GenP) all-in cost of production increased to RM1,900/tonne in FY21 from RM1,860/tonne in FY20. So far, most of the planters are guiding for flat or slightly higher cost of production per tonne in 2022F as the higher costs of fertiliser and wages are offset by the increase in the volume of CPO production and palm kernel credits. Fertiliser costs are expected to surge by more than 50% YoY in 1H2022.

• Downstream EBIT margins were relatively flat in 2021 on the back of higher selling prices. So far, the integrated plantation companies have managed to pass on the higher costs of raw materials in the form of increased selling prices. SDP’s downstream (differentiated, bulk products and trading) EBIT margin was relatively flat at 3.4% in FY21 vs. 3.5% in FY20. KLK manufacturing (mainly oleochemicals and refining) EBIT margin eased to 6.0% in 4Q2021 from 6.2% in 4Q2020. IOI’s manufacturing (refining and oleochemicals) EBIT margin (including associates and fair value changes) improved to 3.8% in 4Q2021 from 0.9% in 4Q2020, underpinned by higher selling prices of oleochemical products.

• Take some profits. We believe that there is more downside than upside at spot CPO prices of almost RM7,000/tonne. Our 2022F average CPO price assumption is RM4,000/tonne for most of the companies in our coverage. We have raised KL Kepong’s FY22F net profit by more than 50% to account for the higher average CPO price assumption of RM4,000/tonne vs. RM3,000/tonne previously. Our new fair value for KLK is RM23.70/share based on a FY23F PE of 22.0x. We have raised KLK’s FY23F net profit by 7.8% to account for a higher CPO price of RM3,000/tonne vs. RM2,800/tonne originally.

Source: AmInvest Research - 7 Mar 2022