Investment Highlights

• 2Q2022 results were largely within consensus but above ours. The exceptions wereSime Darby Plantation (SDP), which fell short of consensus and TSH Resources, which surpassed street expectations. SDP’s upstream division was hit by high costs of CPO production in Malaysia and Indonesia’s ban on CPO exports in May. On the flip side, TSH’s net profit grew by 61% QoQ to RM76mil in 2QFY22 as it benefited from a low effective tax rate and a 21% QoQ surge in FFB output.

• Average realised CPO prices of the large planters were mostly below MPOB spot price of RM6,552/tonne in 2Q2022. The pure planters in Malaysia enjoyed higher selling prices than their integrated counterparts in 2Q2022. The integrated companies sold forward some of their CPO at low prices and recorded weaker prices in Indonesia. Hap Seng Plantations’ (HSP) average selling price of RM6,737/tonne was higher than the Sabah spot price of RM6,411/tonne n 2Q2022 due to RSPO premiums. In contrast, Kuala Lumpur Kepong’s (KLK) average CPO price of RM4,857/tonne in 2Q2022 was RM1,695/tonne lower than the MPOB spot price of RM6,552/tonne.
• Price discrepancy between CPO in Malaysia and Indonesia widened in 2Q2022. We attribute this to Indonesia’s ban on CPO exports in May. Due to the export ban, CPO prices in Indonesia plunged in May and June. Based on SDP and TSH’s CPO prices, we believe that the price difference between Malaysia and Indonesia widened to RM1,500/tonne, at least in 2Q2022 (1Q2022: RM1,300/tonne). SDP’s average realised CPO price in Indonesia was RM4,352/tonne in 2Q2022 compared with the MPOB spot price of RM6,552/tonne (difference of RM2,200/tonne). TSH recorded an average CPO price of RM5,076/tonne in 2Q2022 vs. MPOB’s spot price of RM6,552/tonne (difference of RM1,476/tonne).
• Indonesia’s export ban on CPO in May affected Malaysian large planters more than their Indonesian peers. KLK’s palm refineries and palm kernel crushing were in the red in 2Q2022 while SDP’s upstream Indonesian EBIT fell by 31% QoQ to RM106mil. Among the major SGX-listed Indonesian planters, only First Resources recorded a QoQ drop in 2Q2022 net profit. Bumitama Agri’s net profit surged by 50% QoQ to Rp1,306bil in 2Q2022 in spite of Indonesia’s export ban in May.

• SDP and IOI’s downstream margins improved QoQ in 2Q2022. SDP, IOI and KLK recorded inventory write-downs as palm product prices declined in 2Q2022. In spite of this, SDP and IOI’s downstream EBIT improved QoQ in 2Q2022. SDP benefited from higher earnings from the differentiated and bulk products segment in the Asia Pacific region while IOI enjoyed higher refining margins. IOI’s manufacturing EBIT (ex-fair value changes and associates) fell in the previous 2 quarters. In contrast to SDP and IOI, KLK’s manufacturing EBIT slid by 39% QoQ to RM229mil in 2Q2022 due to losses in the palm refining and kernel crushing segments as well as inventory write-downs of RM126mil.

• UNDERWEIGHT as we believe that sector earnings have peaked. Going forward, we reckon that plantation profits would be soft due to lower CPO prices and higher production costs. In addition, CPO prices may ease on rising supply and soft demand from India and China. India has ample reserves of edible oils at the ports and pipelines while certain places in China are affected by Covid-19 lockdowns. India’s inventory of edible oils stood at 2.3mil tonnes as at 1 August 2022 vs. 1.7mil tonnes as at 1 August 2021.

Source: AmInvest Research - 2 Sept 2022