- Lower CPO prices assumed for 2015F. We have assumed lower FY15F CPO prices of RM2,200/tonne to RM2,300/tonne for the companies under our coverage during the results season in August 2015. The CPO price assumption of RM2,300/tonne is for IOI Corporation, which has a year-end of 30 June 2016. Year-to-date, average CPO price was RM2,198/tonne. We have assumed average CPO prices of RM2,400/tonne to RM2,500/tonne for 2016F. About 50% of the plantation companies in our stock universe met or exceeded consensus estimates while the balance 50% fell short of expectations.

- Earnings fell YoY but improved QoQ in 2Q2015. Comparing 1H2015 against 1H2014, EBITDA or gross profit of the planters fell on weaker CPO prices and production. Comparing 2Q2015 against 1Q2015, earnings improved on the back of enhancements in plantation margins and FFB production. The weak FFB output growth of -9.2% to 5.4% YoY in 1H2015 was due to lagged impact of the dry weather, which took place in Peninsular Malaysia in 1Q2015 and drought in Sabah. Comparing 2Q2015 against 1Q2015, FFB output expanded by 7.5% to 38.1%. Going forward, FFB production in Malaysia is expected to peak in either September or October. Risk is weather. A few industry players have indicated that the weather could become dry again in Sabah in September after improved rainfall in July and August. We understand that the weather in Kalimantan was dry in July after excessive rainfall in 1H2015.

- Smaller unrealised forex losses in 2Q2015. Unrealised forex losses were smaller in 2Q2015 compared with 1Q2015 as the USD/RM exchange rate was stable. We think that unrealised forex losses would spike up again in 3Q2015 as the USD had surged. Average exchange rate was USD1.00:RM3.6597 in 2Q2015. So far in 3Q2015, the average rate was USD1.00:RM3.9319. The forex losses are expected to remain unrealised until the USD borrowings are repaid. We reckon that this is unlikely as most companies are anticipated to refinance or roll-over the USD borrowings.

- Top pick is IJM Plantations (IJMP). Average age of IJMP’s oil palm trees in Indonesia is three to four years old. About 31.2% of the group’s FFB production came from Indonesia in 1QFY16. Balance sheet is solid as reflected in the net gearing of 24.1% as at end-June 2015. Among the big-caps, we like Kuala Lumpur Kepong (KLK). Average age of KLK’s oil palm trees in Indonesia is nine years old while average age of the trees in Sabah is about 15 years. About a third of KLK’s plantation earnings come from Indonesia. KLK’s net gearing stood at 23.7% as at end-June 2015.

Source: AmeSecurities Research - 3 Sep 2015