• Only FGV missed our target, while the rest were within our expectations.

• FFB production fell by an average 18% qoq, but rose by 17% yoy.

• We expect to see further margins improvement in 2Q17 due to higher expected CPO price realized of RM2,600/MT – RM2,900/MT and improvement in FFB production.

• Maintain Neutral as we believe palm oil production recovery may be offset by the lower palm product prices anticipated in 2H17.

Earnings were in-line with estimates

The recently concluded corporate earnings season was unspectacular, in our opinion. Overall, 1Q17 results for companies under our coverage were broadly in-line with our expectations. Out of 9 companies under our coverage, 8 were in-line whilst FGV came in below our forecast. Earnings were generally higher compared to 1Q16. Basically, the better earnings yoy were mainly due to these factor below: 1. Higher palm product price realized, 2. Higher sales volume; and 3. Higher FFB production. The higher ASP for palm product realized, as well as higher production and sales volume resulted in higher revenue for almost all plantations stocks under our coverage with growth rate ranging from 14% yoy (THP) to 53% yoy (GENP). Performance on qoq basis was quite disappointing, as higher ASP palm product realized was unable to offset the lower sales volume of CPO. For companies such as FGV and GENP, their performance was negatively affected by lower sales volume of sugar (FGV) and property sales (GENP). As a result plantation companies registered lower performance compared to 4Q16 that ranged from 5% qoq to 22% qoq. The exception was TSH and HAPL, where higher CPO sales volume and CPO production lifted their revenue higher qoq (HAPL: 12% qoq; TSH: 18%). As for FGV, PATAMI weakened to RM2.5m (from RM110.6m in 4Q16), as improved in palm product prices was negated by a loss in both sugar and plantation sectors that was due to higher raw sugar cost, lower FFB and CPO production, and impairment of receivables and provision for litigation loss on a vessel arrest amounting RM29.6m and RM32.8m respectively.

FFB production fell by an average 18% qoq

Adjusted for non-cash items, all companies under our coverage recorded a weaker qoq earnings performance (Table 1). This was mainly due to lower FFB production, as well as lower margins from downstream segments. Lower sales volume and higher palm product prices resulted an increase in cost of material, which aided to a narrower margin in the downstream segment. We observed that, companies with higher percentage of older and immature estates (out of its total planted area) tend to registered sharper declines in FFB production. HAPL and IOIC’s FFB production slid 26% and 21% respectively as they have 52% and 25% older trees in their planted land bank. Whereas TSH and GENP contracted by 23% and 24% respectively, as both company have higher percentage of immature area of 31% and 29% respectively compared with their peers. However, companies with plantations land bank in Indonesia as well as with better crop mix of immature, young mature, prime and older trees recorded relatively smaller declines in FFB productions.

Encouraging yoy performance

As for yoy performance, almost all companies managed to post better earnings. This was largely due to margins expansion in plantation’s segment that was supported by 1) higher palm product price realised, 2) lower unit cost of production, and 3) recovery in FFB production (especially from Indonesia operations). The higher earnings in plantation’s segment has more than mitigated the lower contribution from downstream segments, as well as property, sugar and other segments. Three out of nine companies managed to get CPO ASP realised of above RM3,000/MT (GENP: RM3,053/MT; FGV: RM3,061/MT and HAPL: RM3,268/MT) with others ranged between RM2,753/MT to RM2,999/MT.

FFB production for companies under our coverage increased by an average 17% yoy with GENP and IJMP registered higher rise in production. IJMP and GENP increased 31% and 29% yoy respectively as both companies have plantation estates in Indonesia - as we believe these companies have larger areas reaching maturity and higher yielding age bracket. Group FFB production for IJMP increased 31% yoy in 1Q17 as Indonesian-estates grew by 28% yoy to 113k MT and by 35% yoy to 84.5k MT in Malaysia-estates. Similarly GENP’s group FFB production increased 29% yoy in 1Q17 driven by Indonesian-estates that grew by 48% yoy to 155k MT and by 19% yoy to 250k MT in Malaysia-estates.

Can the momentum be sustained?

In-line with our expectations, most companies under our coverage guided a strong recovery in 2017 production with majority of them targeting double-digit growth rate, especially for Indonesia’s estates (>30%). Malaysian estates meanwhile are expected to see a target growth of 10%-15%. As for HAPL, management guided that FFB production is expected to decline by 3% yoy in FY17F (FY16: 662.8k tones) as 1) its Sabah estates are still impacted by the last year’s episode of EL-Nino, and 2) several estates will be undergoing replanting activities. TSH’s also expected that FFB production to be soften in May and June due to fasting month and Hari Raya festivities but then to recover strongly in 2H17 compared with 1H17.

Higher margins expected in 2Q17

We expect to see further margins improvement in 2Q17 as CPO price realized is expected to be at a range of RM2,600/MT – RM2,900/MT, as opposed to 1Q17’s range of RM2,753/MT- RM3,268/MT. The improvement in FFB production will boost topline. We expect FFB production growth to turn positive qoq with strong double-digit growth yoy (>20%), mainly driven by higher crop from Indonesia as more areas come into maturity and existing mature areas moved into higher yielding age brackets (GENP, IJMP, and TSH). The only hiccup is the higher palm product prices may result in a narrower margin for downstream segment, hence partially offsetting the better results from plantation segment.

FGV saga is the main story

As a consequent to the higher CPO price in 1Q17, the FBM Plantation index performed positively by 5.86% YTD (FBMKLCI: 5.99%). Share price of plantation companies under our coverage also rode the positive sentiment. On an individual basis, FGV has outperformed the others, surging by 35% YTD, followed by GENP +8%, THP +7% and IOIC +6%. The rally in FGV’s price however is only short-lived. The share price fell to RM1.66 due to leadership crisis in the company whereby the CEO and CFO has been asked to go on leave. The current leadership crisis in FGV in our view, will definitely impact FGV’s future outlook, prospect and strategy. We believe FGV’s share price is risk for

further decline should the crisis prolonged or the outcome is unfavorable from investors’ perspective. There might be a setback in achieving FGV’s 2020 vision to improve bottom-line as well as investors’ confidence (refer report dated 16 May 2017). To recap, the company has incurred 2 consecutive years of net core loss of RM106m in FY15 and RM157m in FY16. In 1QFY17, the Group core net profit recovered to RM0.5m mainly due to higher contribution from plantation sector as well as logistics and other sector (excluding the fair value charges and gain). We maintain our SELL recommendation on the stock with target price of RM1.59. The target price is based on blended valuation of average 2-yrs historical PBV and PNTA of 1x and 1.35x. (BV/share – FY15: RM1.60; FY16: RM1.59; NTA/share – FY15: RM1.17; FY16: RM1.16). Against our forecast, the stock currently trades at FY17F PER of 41.5x, higher than the current sector PER of 24x and KLK of 21x. (Average 3-yrs PER- FGV: 57.6x; KLK: 23.9x and KLPLN Index: 26.9x).

Average CPO price forecast at RM2,550/MT for 2017

We are maintaining our prediction that CPO price will trade within a range of RM2,600/MT – RM2,900/MT in 2Q17 and RM2,200/MT – RM2,600/MT in 3Q17. We think CPO price may not be sustainable at this level as prices is expected to soften in 2H17, once production starts to increase and companies start reporting bumper crops. We believe the recent decline in CPO price in the derivatives market is a reflection of the anticipated higher production and stockpiles; to be compounded by weak demand. However, we strongly believe that the major catalyst of CPO price movement is Soybean Oil (SBO) price direction. In recent months, the CPO movement and SBO differentials is at USD69/T, dropped from its peak in 2008 of USD423/T to a current gap ranging from USD60/T to USD100/T. We maintain our average CPO price forecast for 2017 at RM2,550/MT.

Maintain NEUTRAL

We maintain Neutral on the plantation sector as most of the plantation companies under our coverage are fully valued, in our view. We also believe that our prediction of palm oil production recovery may be offset by the lower palm product prices anticipated. Valuation-wise, the Plantations Index currently trades at 23.9x, below its 5-year historical average PER of 25.7x. Maintain BUY on KLK (TP: RM26.58) and Batu Kawan (TP: RM20.42) while HOLD on Hap Seng (TP: RM2.52), TSH (TP: RM2.00), GENP (TP: RM11.22), IOIC (TP: RM4.74) and IJMP (TP: RM3.06). We have a Sell on FGV (TP: RM1.59) and a non-rated for TH Plant (TP: RM1.59).

Source: BIMB Securities Research - 13 Jun 2017