Investment Highlights

• Mixed set of results in 4Q2023. 4 companies were within our expectations while another 3 were disappointing. Sime Darby Plantation (SDP) was affected by high upkeep costs and a RM27mil loss in the PNG upstream division in 4QFY23 while KL Kepong (KLK) was dragged by poor manufacturing earnings. FGV was hit by an increase in the cost of production and a fall in FFB production.

• Sector’s core net profit fell by 60% in 2023. After a blistering 2022, plantation companies recorded weaker CPO prices in 2023. Also, integrated companies suffered from thin refining margins and poor oleochemical demand due to the hike in global interest rates and fierce competition from Indonesia. Average MPOB spot price fell by 25.2% to RM3,833/tonne in 2023 from RM5,126/tonne in 2022. Average palm kernel price plunged by a sharper 35.3% to RM2,016/tonne in 2023 from RM3,118/tonne in 2022.

• On a positive note, FFB yields recovered in 2023. We attribute this to dissipating effects of 2019’s El Nino and a higher number of estate workers. Recall that the industry faced a severe labour shortage of 70,000-80,000 workers in 2021 and 2022. The companies in our coverage registered 4%-6% increases in FFB production in 2023. Exceptions were TSH Resources and FGV Holdings. TSH was affected by the disposal of estates in Sabah and Indonesia. FGV’s FFB yields were dragged by inadequate fertiliser application in previous years. TSH’s FFB output slid by 2% in 2023 while FGV’s FFB production fell by 8.7%.

• Cost of production per tonne rose in 2023. This was due to higher costs of upkeep, manuring and wages. Although global fertiliser prices eased in 2023, the companies in our coverage only enjoyed the benefits in 2H2023. Fertiliser costs were still high in 1H2023 due to locked-in prices in late-2022. SDP’s cost of production (cost to customers) rose to RM2,600/tonne in 2023 from RM2,500/tonne in 2022. Genting Plantations’ (GenP) all-in cost of production increased to RM2,580/tonne in 2023 from RM2,440/tonne in 2022.

• Downstream earnings plummeted in 2023. After a record 2022, refineries and oleochemical plants in Malaysia suffered dismal demand, margins and selling prices in 2023. IOI’s manufacturing EBIT (refining and oleochemicals) plunged by 91.3% YoY to RM48.5mil in 2H2023 while KLK’s manufacturing EBIT (refining and oleochemicals) sank by 79.1% YoY to RM57.9mil in 4Q2023. SDP’s downstream EBIT (bulk products, differentiated products and trading) dived by 31.4% to RM562mil in FY23.

• Improving cost outlook in 2024F. Planters are guiding for a lower cost per tonne in 2024F on the back of further declines in fertiliser prices and increased CPO production. Most companies are expected to enjoy a fall of RM150-RM250/tonne in their cost of production. This translates into a cost of CPO production of RM2,200-RM2,300/tonne in 2024F vs. RM2,300- RM2,500/tonne last year. If there is a hike in minimum wage, we believe that the impact would be minimal as estate workers are paid higher than the threshold of RM1,500/month. Currently, estate workers received about RM2,000 to RM4,000/month, depending on their productivity.

• Maintain NEUTRAL rating. We reckon that the low prices of soybean oil and corn would cap the upside to CPO prices. Our 2024F average CPO price assumptions are RM4,000/tonne for pure planters in Malaysia (vs. RM3,833/tonne in 2023) and RM3,700/tonne for large companies (after accounting for the Indonesian price discount of RM300/tonne).

Source: AmInvest Research - 6 Mar 2024