- Indonesia units of a few planters were in the red in 3Q2015. Plantation companies under our coverage realised average CPO prices of RM1,987/tonne to RM2,191/tonne in 3Q2015, and RM2,086/tonne to RM2,235/tonne in 9M2015. These were in line with our expectations. The planters in our stock universe recorded average CPO prices of RM1,700/tonne to RM1,900/tonne in Indonesia in 3Q2015. Comparing 3Q2015 against 2Q2015, we estimate that average CPO price realised in Indonesia declined by 6% to 8% due to the imposition of the export levy of US$50/tonne in Indonesia in July 2015. Using IJMP as a gauge, the difference between CPO prices in Malaysia and Indonesia widened from RM165/tonne in 2Q2015 to RM216/tonne in 3Q2015. Due to the fall in CPO prices in Indonesia in 3Q2015, the Indonesian units of IJM Plantations (IJMP) and Genting Plantations (GenP) were in the red (excluding unrealised forex translation losses). We estimate IJMP’s production cost at RM1,800/tonne to RM1,900/tonne, and GenP’s at RM2,000/tonne in 3Q2015. We believe that the Indonesia divisions of Kuala Lumpur Kepong (KLK) and TSH Resources were profitable in 3Q2015 due to their lower production cost per tonne. On a full year basis, we estimate KLK’s Indonesia production cost at RM1,400/tonne to RM1,500/tonne (ex-mill), and TSH’s production cost at RM1,200/tonne to RM1,300/tonne (ex-mill).

- FFB production improved by (-7%) to 5% YoY in 9M2015. We attribute the weak growth to unfavourable weather conditions in 1Q2015. Comparing 3Q2015 against 2Q2015, FFB output of the planters climbed by (-0.8%) to 33% in line with the seasonally stronger production period. Going forward, an industry expert has forecast Malaysia’s CPO production to inch down from 20mil tonnes in 2015F to 18.9mil tonnes in 2016F due to lagged impact of the dry weather in Sabah in 1Q2015. In 2016F, the decline in palm oil production in Indonesia is expected to be sharper than Malaysia’s due to El Nino. Plantation companies with higher exposure to Indonesia might experience a weaker growth in FFB production compared with companies with more operations in Malaysia.

- Net gearing of some planters has increased due to weak Ringgit and lower CPO prices. Although IOI’s USD loans edged down from US$1.48bil as at end-June to US$1.44bil as at end-September, the group’s net gearing surged from 94% to 145% in RM terms due to the depreciation of the RM. About 87% of IOI’s borrowings are denominated in USD. Lower CPO prices had also resulted in higher net gearing for a few planters due to the fall in operating cash flows. A notable highlight is the swing in Felda Global’s operating cash flows from a positive RM1.0bil in 9MFY14 to a negative RM965.3mil in 9MFY15.

- Top pick is IJM Plantations (IJMP). Although IJMP’s 2QFY16 results were below expectations, we believe that as FFB yields improve underpinned by oil palm trees entering the prime years, the group would be able to lower its production per tonne in Indonesia in the future. As such, we are keeping our BUY recommendation on IJMP. Among the big-caps, we like Kuala Lumpur Kepong (KLK) for its oil palm trees in Indonesia, which are in the average prime age of nine years old, and the company’s low net gearing of 26%.

Source: AmeSecurities Research - 1 Dec 2015