• Overall, 1Q2020 performance for companies under our coverage was mixed with 3 coming in below our expectations, 2 above and 4 within our expectations.

• We made earnings downgrades to almost all our companies under coverage imputing lower ASP of palm products, FFB and CPO production as well as downstream margins on lower sales volume and higher costs expected.

• Maintain Neutral on the sector. Higher PO price is insufficient to compensate for the expected weak production and higher costs which continue to be a risk to planters’ earnings. We upgraded TSH to BUY following the May results, as the sharp decline in share price presents value. Maintain average CPO forecast of RM2,300/MT in 2020.

Fewer disappointments, more inline and above

With the 1Q20 results season having recently concluded, out of 9 stocks under our coverage, 4 companies were within expectation with 2 above and 3 came in below our expectation. Most of the companies reported lower yoy/qoq production (Table 2). Among those that were below our expectations, FGV made a bigger loss due to lower margins in both sugar and plantation sector accompanied by higher CPO production costs. While the others i.e. IOI and GENP’s poorer performance was due to lower manufacturing margins, lower sales volume, and higher forex loss.

Change in earnings forecast

During the period, we made earnings downgrade to almost all of our companies under coverage. Our FY20 and FY21 net profit forecast for the sector is reduced by an average 20% and 13% respectively. The reduction is due to our revised PO price, production and downstream margins on stronger-than-expected competition in value-add products, i.e. oleo-chemical and speciality oil & fats. We revised our sector average CPO price assumption for 2020 to RM2,300/MT from RM2,480/MT previously in our previous sector report dated 7 May 2020. Hence, we lower our CPO price assumption for companies under our coverage by 5%-7% from earlier forecast of RM2,400/MT - RM2,480/MT to RM2,250/MT - RM2,350/MT. As such, earnings growth is expected to average at c. 5% yoy in 2020.

Outlook

We are of the view that earnings upside this year is limited by high operational costs and suppressed profit margin on lower-than-expected production and sales volume. We might see some margins improvement in 2H20 earnings result on higher expected palm products price achieved vs. 2019 and further improvement in FFB production. If production progresses well in 2H20, we expect performance of pure plantation companies to be favourable given current palm products prices currently trading above 2019’s average prices. Nonetheless, there might be high possibility of margins squeeze in downstream players as demand and price (feedstock and selling price) concerns heighten.

NEUTRAL call on sector retained

Maintain Neutral on the sector with unchanged average CPO forecast for 2020 of RM2,300/MT. Variances in earnings forecast would be due to lower-than-expected production, ASP realised of palm products and higher-than-expected costs. Risk factor include 1) lower-than expected demand from major importing countries, 2) weakening of crude oil prices, and 3) unforeseen market changes i.e. prolong Covid-19 pandemic and movement restriction.

Source: BIMB Securities Research - 3 Jun 2020