• The 4Q18 earnings season saw only Sarawak Plant beat our expectation, whilst 6 (or 50%) out of 12 companies in our coverage came in below.

• Aggregate FFB production of companies in our coverage rose by an average 12% qoq and 8% yoy.

• We expect to see margins improvement in upcoming 1Q2019 earnings due to higher expected CPO price realized vs. 4Q18 (although this might fall-short from 1Q18), and further improvement in FFB production.

• Maintain Underweight the sector against the likely scenario that a lower ASP of palm products would continue to be a risk to earnings.

More misses than beating expectation, still

The recently concluded corporate earnings seasons was unsatisfactory, in our opinion. Among 12 plantation companies under our coverage, only one beat our expectation, namely Sarawak Plantation (SPB). A total of 6 companies missed our earnings targets, whilst 5 companies came in within our expectation (Table 1). Earnings were generally lower QoQ/YoY/YTD mainly due to: 1) Lower palm product price realized and sales volume transacted, 2) higher operational costs; and 3) Huge one-off impairments and higher net foreign exchange losses on USD denominated borrowings.

FFB production rose by an average 12% qoq and 7.9% yoy

From our compiled data, companies with higher percentage of mature estates and/or exposure in Indonesia tend to register higher growth in FFB production i.e. IOI, HAPL, GENP and IJMP, which registered double-digit growth qoq (Table 2). However, companies with young oil palm trees and land-bank in Sarawak or Sabah (SOP, TSH and THP) recorded relatively lower growth in FFB production.

What to expect in Q1 2019?

The weak ASP of palm products has negatively impacted revenue generation capability of plantation company in 4Q2018, hence squeezing the margin of upstream operations. We believe plantations companies are at risk of further earnings disappointment in the next 1Q2019 earnings as CPO price realized is expected to hover between RM2,150/MT-RM2,300/MT against RM2,393.50/MT– RM2,550.50/MT in Q1 2018 (although better than 4Q2018). We forecast earnings growth for companies under coverage to be a mixture of positive and negative growth in 2019, averaging at 13% yoy.

Underweight call on sector retained

We believe 6 primary issues will likely play out for 2019, hence exerting downward pressure on CPO price; namely 1) sluggish export demand, 2) higher CPO inventory, 3) bearish soybean and soybean oil prices – CPO losing its competitiveness, 4) strengthening of ringgit, 5) volatile crude oil prices, and 6) low biodiesel off-take. We maintain our average CPO price forecast for 2019 of RM2,280/MT and RM2,350 for 2020. We retain Underweight on the sector as most of the companies under our coverage are fully valued and are at risk of further earnings disappointment on weak palm product prices outlook. We have Hold on KLK (TP: RM24.25), BKawan (TP: RM17.28), HAPL (TP: RM1.90), TSH (TP: RM1.06), GENP (TP: RM10.33), IOIC (TP: RM5.00), SOP (TP: RM2.46), FGV (TP: RM1.13) and SDPL (TP: RM5.03). Sell on IJMP (TP: RM1.47), Under Review on Sarawak Plant; whilst a non-rated for TH Plant.

Earnings for 4Q18 impacted by weak ASP of palm products

Among the 12 plantation companies under our coverage, only one beat our expectation, i.e SPB. Five companies came in within our expectation whilst 6 companies or 50% of our coverage missed our targets (Table 1). Additionally, 5 out of 12 companies i.e. IOI, KLK, BKawan, SIME Darby Plant and HAPL reported better qoq performance mainly due to higher profit from downstream segment, aided by non-recurring gain or forex gain. For HAPL, the qoq earnings growth was due to higher productions and sales volume transacted that helped to mitigate a weak ASP of palm products.

Source: BIMB Securities Research - 5 Mar 2019