Investment Highlights

• Mixed set of results. 3 companies were within expectations while 2 were below. SD Guthrie (SDG) exceeded our forecast due to higher-than-expected downstream earnings.

• Sector earnings expanded by 73.4% YoY in 1H2024. This was driven mainly by SDG as earnings rebounded on the back of a 35% recovery in FFB output in Malaysia. Excluding SDG, sector net profit rose by 50.8% YoY in 1H2024, supported by lower fertiliser costs and absence of KL Kepong’s (KLK) asset impairments. We believe that fertiliser costs declined by 20%- 30% YoY in 1H2024. Looking ahead, we believe that fertiliser prices would remain flat as potash production is expected to improve on lower input costs.

• FFB output growth was muted in 1H2024. Companies in Sabah were affected by low cropping patterns, tree stress and floods. Companies with Indonesian operations were affected by lagged effects of dry weather in 3Q2023. With the exceptions of KL Kepong (KLK) and SDG, the companies in our coverage recorded FFB production growth of -4.7% to 0.3% YoY in 1H2024. YoY, KLK’s FFB expanded by 8.9% YoY and SDG by 8.2% in 1H2024.

• Sabah’s CPO prices are higher than Peninsular Malaysia. According to MPOB, average spot price in Malaysia was relatively flat at RM4,011/tonne in 1H2024 vs. RM3,921/tonne in 1H2023. Interestingly, CPO prices in Sabah have been higher than Peninsular Malaysia for some time, indicating that transportation discount has been eliminated. We believe that palm supply in Sabah is tighter than Peninsular Malaysia. Average CPO price in Sabah was RM4,062/tonne in 1H2024 compared to RM4,029/tonne in central Peninsular Malaysia.

• Cost of CPO production per tonne eased in 1H2024 due to a decline in fertiliser costs. SDG’s cost of production (cost to customers) slid to RM2,567/tonne in 1H2024 from RM2,800/tonne in 1H2023, underpinned by higher FFB output in Malaysia and lower fertiliser costs. Among pure planters, Hap Seng Plantations’ (HSP) cost of production (ex-amortisation but including palm kernel credits) declined to RM2,500/tonne in 1H2024 from RM2,752/tonne in 1H2023. On the flip side, Genting Plantations’ (GenP) all-in cost of production was marginally higher at RM2,880/tonne in 1H2024 vs. RM2,850/tonne in 1HFY23 as higher cost of wages offset lower fertiliser costs.

• Downstream earnings recovered QoQ in 2Q2024. Exception was KLK, which was hit by refining losses. QoQ, IOI downstream EBIT surged by 3-fold while SDG by 60% in 2Q2024. IOI recorded fair value gains of RM61.9mil on financial instruments in 2Q2024 vs. losses of RM57.3mil in 1Q2024 while SDG enjoyed higher trading income. Trading accounted for 26.8% of SDG’s downstream EBIT in 1H2024. Looking ahead, IOI and SDG said that demand from EU is improving as the region stocks up before EUDR (EU Deforestation Regulation) is implemented on 30 December 2024.

• NEUTRAL. We believe that higher supplies of corn and soybean would restrict upside to 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 - 3 Sep 2024