Investment Highlights

• After a sterling 1H2022, 3Q2022 results were mostly below our forecast and consensus. Only FGV Holdings, IOI Corporation and Kuala Lumpur Kepong (KLK) met our estimates. The planters were affected by lower CPO price and an increase in the cost of production in 3Q2022. Sime Darby Plantation (SDP) was hit by an acute labour shortage, which resulted in a RM145mil loss in the Malaysia upstream division. SDP’s cost of production in Malaysia (cost to customers) increased to RM3,000/tonne in 9M2022 from RM1.900/tonne in 9M2021. Genting Plantations’ (GenP) all-in cost of production rose to RM2,690/tonne in 3Q2022 from RM2,290/tonne in 2Q2022.

• Costs of fertiliser and wages increased in 3Q2022. Sector earnings were strong in 1H2022 as the rise in the costs of production was offset by robust CPO prices. However as CPO prices slid in 3Q2022, the impact of higher costs of wages and fertiliser showed. We believe that fertiliser costs will double in 2022E.Going forward although fertiliser prices have declined in USD terms, there is a possibility that they may be flat or higher in MYR as the MYR has depreciated. GenP’s fertiliser costs are expected to be 10% YoY higher in 1H2023.

• Average CPO price realised fell by 14% to 36% QoQ in 3Q2022. The large planters realised average CPO prices of RM3,815/tonne to RM4,496/tonne in 3Q2022 vs. RM4,857/tonne to RM5,260/tonne in 2Q2022. The purer companies recorded average CPO prices of RM3,234/tonne to RM5,219/tonne in 3Q2022 compared with RM4,907/tonne to RM6,737/tonne in 2Q2022. CPO prices eased in 3Q2022 as Indonesia swelled with palm inventories after banning exports of crude and refined palm products in May.

• On a positive note, FFB output rose QoQ in 3Q2022. The companies in our coverage registered 3.7% to 16.4% QoQ improvements in FFB production in 3Q2022. This was in line with seasonal factors. We believe that FFB production in Malaysia peaked in October. KL Kepong (KLK) recorded the highest QoQ increase in FFB production of 16.4% in 3Q2022 while Sime Darby Plantation’s (SDP) FFB output growth was the smallest at 3.7%.

• Price gap between CPO in Malaysia and Indonesia narrowed in 3Q2022. Based on SDP and TSH’s CPO prices, the price difference between Malaysia and Indonesia ranged from RM756/tonne to RM1,077/tonne in 3Q2022. This was smaller than RM1,300/tonne in 1Q2022 and RM1,500/tonne in 2Q2022. The decline in the price gap in 3Q2022 was due to the reduction in Indonesia’s CPO export taxes in August and September. Indonesia also waived the CPO export levy.

• Downstream earnings declined QoQ in 3Q2022 except for SDP. This was due to weaker sales volume and selling prices. We believe that companies with downstream units in Europe also suffered from higher energy costs. IOI’s manufacturing EBIT (oleochemicals and refining) (including associates and fair value changes) dived by 56% QoQ to RM129mil in 3Q2022 while KLK’s downstream EBIT (oleohemicals and refining) fell by 35% to RM148mil. On the other hand, SDP’s downstream EBIT (trading, bulk and differentiated products) expanded by 38% to RM336mil in 3Q2022 from RM243mil in 2Q2022 on the back of higher trading profits. SDP’s EBIT margin improved to 6.8% in 3Q2022 from 4.6% in 2Q2022.

• NEUTRAL. We believe that the rise in palm supply in 2023F would restrain any upside to CPO prices. Currently, Oil World forecasts CPO production to improve by 0.3mil tonnes in Malaysia and 2.2mi tonnes in Indonesia in 2023F. CPO output in Malaysia is expected to increase on the back of a higher number of workers while FFB yields in Indonesia are anticipated to recover in 2023F.

Source: AmInvest Research - 6 Dec 2022