Investment Highlights

• A mixed 3Q2017 – integrated companies did better than purer players. It was a mixed bag of 3Q2017 results. About half of the results were in line with our expectations while another half were below. Integrated plantation companies performed better than the purer ones due to a recovery in downstream earnings. Also, although CPO production of most companies were higher QoQ, a few planters such as Genting Plantations (GenP) recorded lower upstream earnings in 3Q2017. GenP was affected by an increase in inventory of refined palm products, which was worth about RM32.2mil in earnings in total. Downstream earnings of the integrated plantation companies improved QoQ in 3Q2017 supported by a decline in feedstock costs and an absence of inventory write-downs.

• CPO price was marginally weaker QoQ in 3Q2017 while FFB production was more than 5% higher. Average CPO price realisedby the plantation companies ranged from RM2,555/tonne to RM2,693/tonne in 3Q2017. These were roughly 2.9% to 5.8% lower compared with 2Q2017. In comparison, the QoQ FFB production growth of the plantation companies ranged from 8.6% and 34.0% in 3Q2017. The exception was IJM Plantations, which recorded a 7.0% QoQ fall in FFB output in 3Q2017. Also, most companies adhered to their fertiliser application schedule in 3Q2017. Looking ahead to 4Q2017, there may still be some fertiliser application expenses although they are not expected to be as high as the previous quarters. Fertiliser application usually declines towards the end of the year due to the monsoon season.

• Mixed outlook on FFB production in 4Q2017. Most Indonesian companies are guiding for flat or marginally lower FFB production in 4Q2017 vs. 3Q2017. Indofood Agri said that its FFB production in 4Q2017 would be lower than 4Q2016. Golden Agri Resources said that its peak palm production had already taken place in 9M2017. In contrast, Genting Plantations (GenP) said that its FFB production in 4Q2017 may be better than 3Q2017. During its analyst briefing, Hap Seng Plantations had a similar view. From these, we surmise that FFB production in Sabah may reach its peak only in 4Q2017. However, FFB output in Indonesia may have reached its highest level in 3Q2017. Several companies said that FFB production in Indonesia may reach another peak in January 2018. There is no guidance on FFB production growth in 2018F yet with the exceptions of Sime Darby Plantation (SDP), GenP and Golden Agri Resources. GenP expects to maintain its FFB production growth of 15% in FY18F (FY17F: 15%) underpinned by the acquisition of 12,893ha of estates from Lee Rubber while Golden Agri estimates an FFB output increase of 10% in 2018F compared with 10% to 15% in 2017F. SDP sees its FFB production increasing by 5% to 6% in FY18F vs. 1.7% in FY17.

• 4Q2017 earnings may be weaker than 3Q2017. Average CPO price may be lower in 4Q2017 vs. 3Q2017. CPO prices started declining since India increased the import duties on vegetable oils on 17 November 2017. With a softer CPO price and mixed production outlook, plantation earnings may not be exciting in 4Q2017 unless there is a sharp drop in manuring and maintenance expenses. Based on MDEX prices, average spot CPO price has been RM2,717/tonne so far in 4Q2017 compared with RM2,682/tonne in 3Q2017.

• NEUTRAL stance on the sector. We are keeping our CPO price assumption of RM2,650/tonne for 2018F (2017F: RM2,700/tonne). Based on historical patterns, CPO production growth normally tapers off after a bumper year of harvest. Hence, there is a possibility that CPO production growth in 2018F may be lower than 2017F. This should help support CPO prices. We have BUYs on Genting Plantations with a fair value of RM11.50/share and TSH Resources with a fair value of RM1.90/share.

Source: AmInvest Research - 30 Nov 2017