Investment Highlights

• 2022 was a good year for planters due to a strong 1H. Most of the plantation companies achieved record core earnings in FY22 underpinned by high palm product prices. Planters in our coverage achieved an average net earnings growth of 16% in FY22. Average MPOB spot price surged by 16% to RM5,126/tonne in 2022 from RM4,417/tonne in 2021. To recap, commodity prices jumped to unprecedented levels in 1Q2022 as the Ukraine war affected supplies of vegetable oils. Downstream profits and margins were also at record levels in 2022. This was driven by consumers stocking up during the Russia-Ukraine war, companies raising selling prices to pass on increased costs and strong trading earnings from price volatilities.

• 4Q2022 results were mostly within expectations. After a strong 1H2022, commodity prices weakened in 2H2022 as hikes in global interest rates took place. Additionally, there were concerns that high prices were causing demand destruction. CPO prices also slid as Indonesia swelled with inventories after banning exports in May 2022. In line with lower palm product prices, earnings of palm companies softened in 2H2022. Plantation companies’ earnings were mostly below expectations in 3Q2022 but within in 4Q2022.

• Cost per tonne increased in 2022. This was mainly due to higher costs of fertiliser, wages and transportation coupled with a lower volume of CPO output. We believe that fertiliser costs doubled in FY22. Looking ahead to FY23F, however, fertiliser costs are expected to fall by more than 10% due to an increase in global supplies. Sime Darby Plantation’s (SDP) cost of production (cost to customers) rose to RM2,500/tonne in FY22 from RM1,860/tonne in FY21. Genting Plantation’s (GenP) allin cost of production increased to RM2,440/tonne in FY22 from RM1,900/tonne in FY21. Hap Seng Plantation’s (HSP) all-in cost of production climbed to RM2,559/tonne in FY22 from RM1,844/tonne in FY21.

• Labour shortage affected FFB production in Malaysia in 2022. Labour shortage ranged from a low of 5% to a high of 38%. Smaller companies such as HSP were not as significantly affected compared to their larger peers. FFB output growth of the companies in our stock universe ranged from -10.1% to 23.8% in 2022. KL Kepong’s (KLK) FFB production growth was healthy at 23.8% in 2022 due to the consolidation of IJM Plantations (now known as Sawit Nusantara). SDP recorded a 10.1% fall in FFB production in FY22 as the group was short of 8,000 workers in Malaysia.

• Price gap between CPO in Malaysia and Indonesia widened in 2022 due to high taxes and levy in 1H. Based on the realised CPO prices of Malaysian and Indonesian planters, we estimate the price disparity to be RM1,400/tonne to RM1,500/tonne in 2022. After widening in 1H2022, the price differential declined in 2H as Indonesia reduced the CPO export tax and levy. In 1H2022, average monthly CPO export tax in Indonesia was US$200/tonne (RM855/tonne) while average monthly CPO export levy was US$288/tonne (RM1,231/tonne). In 2H2022, 7 average monthly CPO export tax fell to US$88/tonne (RM398/tonne) while average monthly CPO export levy slid to US$22/tonne (RM100/tonne).

• NEUTRAL. The increase in global palm supply is expected to restrain upside to 2023F CPO prices. Our average 2023F CPO price assumptions in Malaysia are RM3,500/tonne for the small planters and RM3,000/tonne for the large companies (after accounting for the Indonesian price discount of RM500/tonne to RM1,000/tonne).

Source: AmInvest Research - 6 Mar 2023