Investment Highlights

• A mixed set of results. 2 companies exceeded our estimates while another 3 fell short. The balance 2 were within our expectations. KL Kepong under-performed as the Europe oleochemical operations were affected by restructuring costs of RM70.6mil while Genting Plantations (GenP) outperformed on the back of a higher-than-expected EBITDA margin. Hap Seng Plantations’ (HSP) 3QFY23 net profit was boosted by fair value gains on biological assets of RM15mil.

• Sector earnings recovered in 3Q2023. The earnings recovery in 3Q2023 was led by a stronger FFB production and a decline in fertiliser costs. The pure planters performed better than their integrated peers in 3QFY23. The integrated companies faced weak demand and low selling prices for their oleochemical products. Competition from downstream companies in Indonesia is stiff and there are new oleochemical players in China.

• FFB production expanded QoQ in 3Q2023. We attribute the increase in FFB output to seasonal factors, absence of Hari Raya festivities and improved workers’ productivity. Companies in our stock universe recorded FFB production growth of 11.9% to 28.3% QoQ in 3Q2023. FGV registered the highest expansion of 28.3% while HSP’s 11.9% was the lowest.

• Comparing 9M2023 against 9M2022 however, FFB production growth was unexciting. Except for HSP, FFB production of companies in our coverage improved by only -9.3% to 5.6% YoY in 9M2023. FGV’s FFB fell by 9.3% YoY in 9M2023 as yields were affected by the previous years’ lack of fertiliser application. HSP’s FFB production growth of 12.6% was the highest in our stock universe in 9M2023.

• Average CPO price was flat QoQ in 3Q2023. According to the MPOB, average spot price was RM3,810/tonne in 3Q2023 vs. RM3,846/tonne in 2Q2023. On a yearly basis however, average CPO price dived by 29.8% to RM3,884/tonne in 9M2023 from RM5,531/tonne in 9M2022. Palm kernel (PK) price fell more than CPO price in 9M2023 due to poor demand for palm kernel oil from oleochemical companies. Average PK price plunged by 46.5% to RM2,015/tonne in 9M2023 from RM3,767/tonne in 9M2022.

• Cost of production per tonne eased in 3Q2023. This was driven by the surge in the volume of CPO production and a drop in fertiliser costs. Fertiliser prices have dropped by 30% to 50% from their highs during the Ukraine War. GenP’s all-in cost of production fell to RM2,330/tonne in 3Q2023 from RM2,760/tonne in 2Q2023. We estimate that Sime Darby Plantation’s (SDP) cost of production (cost to customers) in Malaysia slid to RM2,400/tonne in 3Q2023 from RM3,200/tonne in 2Q2023 as FFB production surged by 43%.

• Mixed downstream earnings in 3Q2023. KLK’s manufacturing division (refining and oleochemicals) continued to languish in 3Q2023 with a larger loss of RM76.7mil compared to RM33.3mil in 2Q2023. However, IOI’s manufacturing EBIT (excluding associates and fair changes) recovered by 70% QoQ to RM15.3mil in 3Q2023 after plummeting by 90.7% in 2Q2023. SDP’s downstream (trading, bulk and differentiated products) EBIT jumped by more than 2-fold QoQ to RM275mil in 3Q2023 as strong margins in Europe compensated for weak performances in Asia Pacific.

• NEUTRAL. We believe that soft prices of soybean oil and corn would cap the upside to CPO prices. Our 2024F average CPO price assumptions are RM4,000/tonne for the pure planters in Malaysia and RM3,700/tonne for the large companies (after accounting for the Indonesia price discount of RM300/tonne).

Source: AmInvest Research - 6 Dec 2023