Investment Highlights

• Results were mainly in line with consensus estimates but above ours. On the back of robust CPO prices and production, most of the plantation results in 1Q2022 were within market expectations but above ours. The exception was Genting Plantations (GenP), which was below consensus due to weak downstream earnings. We raise our 2022F average CPO price assumption for the large planters to RM4,500/tonne from RM4,000/tonne.

• Most planters achieved average CPO prices, which were below the MPOB spot price in 1Q2022. This was due to forward sales locked in at lower prices and the Indonesia price discount. Plantation companies in our coverage realised average CPO prices of RM4,378/tonne to RM6,019/tonne in 1Q2022 vs. RM2,916/tonne to RM3,854/tonne in 1Q2021. Planters with operations in Indonesia recorded average CPO price, which were RM1,272/tonne to RM1,939/tonne below the MPOB’s average spot price in 1Q2022. Sime Darby Plantation’s (SDP) average CPO price realised in Indonesia was RM4,112/tonne in 1QFY22 vs. the MPOB average spot price of RM6,051/tonne. TSH Resources’ average CPO price was RM4,779/tonne in 1QFY22 compared with Malaysia’s average spot price of RM6,051/tonne. Almost 90% of TSH’s FFB production are from Indonesia.

• FFB output growth ranged from -13.5% to 23.3% YoY in 1Q2022. Companies with Indonesia estates performed weaker than those with pure exposure in Malaysia. After being affected by floods in Sabah in 1Q2021, most of the plantation companies in Malaysia registered stronger production growth in 1Q2022. We believe that SDP and TSH Resources were dragged by poor FFB yields in Indonesia in 1Q2022 due to floods. Also, recall that Indonesia companies were exceptionally productive in 1Q2021. Going forward, the planters are expecting FFB production to recover. GenP said that 2H would account for 55% of full year’s FFB output while 1H will account for the balance 45%.

• CPO production cost per tonne climbed in 1Q2022. SDP’s cost of CPO production (cost to customers) increased to RM2,300/tonne in 1Q2022 from RM1,800/tonne in 1Q2021. GenP’s all-in cost of production rose to RM2,075/tonne in 1Q2022 from RM1,980/tonne in 1Q2021. The increase in the cost of production in 1QFY22 can be attributed to fertiliser and wages. Fertiliser costs are expected to surge by two-fold this year due to economic sanctions on Belarus and Russia. GenP estimates its cost of production per tonne to rise to RM2,200/tonne in FY22F from RM1,900/tonne in FY21.

• Downstream EBIT margins were lower YoY and QoQ in 1Q2022. Comparing 1Q2022 against 1Q2021, downstreamEBIT margins of most companies declined. GenP experienced a drop in demand for refined palm products in 1Q2022. On a quarterly basis also, IOI Corporation and SDP recorded erosions in downstream EBIT margins. IOI’s manufacturing EBIT margin (excluding associates and fair value changes) shrank to 1.6% in 1Q2022 from 3.2% in 4Q2021 while SDPs downstream EBIT margin slid to 3.3% from 6.1%.

• UNDERWEIGHT. We believe that CPO prices and share prices of the plantation companies have already reflected all of the positive news in the palm sector such as the Ukraine war and Indonesia’s restrictive export policies. In addition, CPO production in Malaysia is expected to increase in 2H2022 supported by the arrival of foreign workers and seasonal factors. Hence, we are underweighted on the sector.

Source: AmInvest Research - 7 Jun 2022