Investment Highlights

• About half are in line. The financial results of half of the plantation companies in our coverage were in line with our forecast and consensus estimates. Three companies fell short of expectations because of a higher effective tax rate in the 4Q while one exceeded. IOI Corporation beat expectations on the back of fair value gains of RM81.8mil on derivatives in 1HFY18 as opposed to fair value losses of RM80.2mil in 1HFY17. The larger and integrated companies such as IOI Corporation, Kuala Lumpur Kepong (KLK) and Sime Darby Plantation (SDP) performed better than their smaller peers like IJM Plantations, TSH Resources and TH Plantations.

• Sector plantation EBIT grows by 12% to 22% in FY17 (December year-end). This was driven mainly by higher CPO price and production. Average CPO price of companies with December year-end was roughly RM2,700/tonne in FY17 vs. RM2,500/tonne in FY16. The average CPO price realised at RM2,700/tonne was RM92/tonne lower than the MPOB's average spot price of RM2,792/tonne for 2017. Companies in our stock universe recorded FFB production growth of 8.9% to 21.3% in 2017. The highest FFB output growth of 21.3% in 2017 was registered by TH Plantations while Felda Global Ventures (FGV) achieved the lowest increase. FGV was affected by a shortage of 7,000 to 8,000 estate workers in FY17. The FFB output growth of Malaysian companies was comparable to their Singapore-listed Indonesian counterparts. Although the Indonesian companies recorded robust growth of 12% to 41% YoY in 9MFY17, they were let down by a fall in production in 4QFY17. FFB output of the Indonesian companies fell by more than 10% YoY in 4QFY17 (with the exception of First Resources, which registered a 1.4% rise). Overall, the five major Indonesia companies listed in Singapore achieved nucleus FFB production growth of 3% to 17.9% in FY17.

• Industry FFB production is expected to improve further in FY18F. Indofood Agri Resources is guiding for a 5% to 10% increase in nucleus FFB production in FY18F vs. a 4% rise in FY17. Genting Plantations is hopeful of a 20% growth in FFB output in FY18F (FY17: 16.7%) partly underpinned by the acquisition of oil palm estates in Kalimantan from Lee Rubber. FGV is expecting its FFB production to rise by 13.8% in FY18F vs. 8.9% in FY17. Industry CPO production in Malaysia climbed by 24.3% YoY in 1M2018 (2017: 15%).

• 1Q2018 earnings to be lower than 1Q2017. We believe that sector earnings in 1Q2018 would be weaker than 1Q2017 due to lower CPO price. Average CPO price has been RM2,520/tonne so far in 1Q2018 (MDEX price) vs. RM3,152/tonne in 1Q2017 (MPOB price). This implies that CPO production would have to grow stronger than the 20% fall in CPO price for earnings to sustain in 1Q2018. We believe that this would be difficult as production costs such as wages have risen.

• NEUTRAL stance on the sector. We are keeping our 2018F average CPO price assumption of RM2,650/tonne for Malaysia for now. Negative factors are India's hike in import duties on palm products and the EU's proposed ban on palm-based biodiesel. Positive factors are rising soybean prices supported by the drought in Argentina and a decline in new plantings of oil palm in Indonesia, which would crimp longterm supply of palm oil. We have a BUY on Genting Plantations with a fair value of RM11.50/share.

Source: AmInvest Research - 6 Mar 2018