Investment Highlights

• All the companies were below expectations. After a sterling performance last year, it was not a surprise that sector earnings fell in 1Q2023. On average, the companies in our coverage recorded a 79% YoY plunge in core net profit in 1Q2023. Upstream earnings were hit by lower palm product prices and higher production costs. Downstream profits were affected by declines in trading gains, sales volume and selling prices. Downstream EBIT margins were also squeezed by increases in energy and staff costs.

• Average CPO price realised slid by 20% to 30% YoY in 1Q2023. Companies in our coverage recorded average CPO prices of RM3,555/tonne to RM4,088/tonne in 1Q2023, which were 20% to 30% YoY lower. Recall that CPO prices started falling from May 2022 onwards dragged by concerns over demand destruction and the swell in inventories in Indonesia resulting from the export ban.

• On a positive note, most of the companies’ FFB production recovered in 1Q2023. FFB output of the planters in our stock universe grew by -4.5% to 14.5% YoY in 1Q2023. Hap Seng Plantations achieved the highest FFB production growth of 14.5% while SDP’s FFB output fell by 4.5%. We attribute the improvement in FFB production in 1Q2023 to dissipating effects of 2019’s haze and drought and a higher number of estate workers. As of 14 March, Malaysia has approved 995,396 foreign workers for all sectors such as plantation, construction, and manufacturing.

• Production cost per tonne increased in 1Q2023. In spite of the higher volume of production, the cost of CPO production per tonne rose in 1Q2023. This was due to higher costs of fertiliser and wages. Although fertiliser prices have fallen by more than 30% since 2H2022, we believe that the benefits will only be felt in 2H2023. Fertiliser costs were higher in 1Q2023 than 1Q2022 as companies sourced supplies that were cheaper in late-2021. Cost of wages increased due to a higher number of workers and a hike in minimum wage in Malaysia in May 2022. Sime Darby Plantation’s (SDP) cost of production (cost to customers) climbed to RM2,700/tonne in 1Q2023 from RM2,300/tonne in 1Q2022. Genting Plantation’s (GenP) all-in cost of production was RM2,960/tonne in 1Q2023 vs. RM2,075/tonne in 1Q2022.

• KLK and SDP’s downstream earnings slumped by 40.2% and 50% YoY respectively in 1Q2023. KL Kepong’s (KLK) manufacturing EBIT (refining and oleochemicals) dived by 40.2% YoY to RM224.5mil in 1Q2023. EBIT margin slipped to 4.4% in 1Q2023 from 7.1% in 1Q2022. SDP’s downstream EBIT (trading, bulk, and specialty products) contracted by 50% to RM66mil in 1Q2023 from RM132mil in 1Q2022. EBIT margin eased to 1.9% from 3.3%. On the other hand, IOI’s manufacturing EBIT (refining and oleochemicals) rose by 10.9% YoY to RM50.8mil in 1Q2023 as Bunge Loders rebounded.

• NEUTRAL. CPO prices are expected to be capped by rising production of corn and soybean in the US and Brazil. In the short-term, palm inventory in Malaysia is also envisaged to increase as the industry enters the peak production period in 2H. Our average 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 Indonesia price discount of RM500/tonne to RM1,000/tonne).

Source: AmInvest Research - 7 Jun 2023