• Overall, 1Q21 earnings released by companies under our coverage was impressive with three coming in above our expectations, six within and one below expectations.

• Narrowing of price differential between CPO and SBO in CBOT is inconsequential, due to anticipation of tight supply of global vegetable oils, led by PO from Malaysia as well as improved demand from China that could dictate higher CPO prices, possibly up until July 2021.

• We see potential upside to plantations’ segment margins in the upcoming 2Q21 earnings season, given higher ASP of palm products and more realistic production expectation.

• We upgrade our sector call to OVERWEIGHT from NEUTRAL as rise in earnings and high CPO prices have resulted in several stocks carrying attractive valuations. Maintain unchanged average CPO price forecast of RM2,950/MT for 2021 and RM2,700/MT for 2022.

Performance was impressive

The recently concluded corporate earnings season was spectacular for plantation companies, in our opinion. Out of 10 stocks under our coverage, 3 companies reported earnings that were above expectations, with 6 inline and 1 came in below our expectation. Earnings were generally higher yoy resulting from greater ASP of palm products and improvement in FFB production. Expansion in margins and profit contribution from downstream manufacturing segment, especially from oleochemical division aided to the better results for KLK and IOI. Conversely, FGV’s weaker performance, apart from higher FV charged on LLA, was due to RM65m losses incurred from the processing of external crops as opposed to RM48m gain a year ago – causing a negative milling margin.

Tight supply set to keep CPO price supported

We are of the view that the higher near-term CPO price is possible. Although any price increase could be capped by the narrowing of the price differential between CPO and SBO in CBOT, we believe this is inconsequential. The anticipation of tight supply of global vegetable oils, as well as improved demand from China means CPO price could retain its upward trajectory, possibly up until July 2021. This is in tandem with our view on tight palm oil supply scenario in Malaysia given unresolved labour shortage issues and recent Malaysian government’s decision to impose a stricter implementation of Movement of Order Control (MCO) on agribusiness. The MCO is limiting workforce capacity in palm oil mills and refineries to 60% in a bid to curb the spread of COVID-19 and likely hurt palm oil production this year by delaying the harvesting and collecting of FFB. Hence, this will in turn impact productivity and the quality of CPO produced. In light of these developments, we foresee that price for June/July 2021 would trade within a range of RM4,100/MT and RM3,800/MT as opposed to RM2,366/MT and RM2,795/MT during the same period last year.

Earnings outlook remains exciting

We expect plantation’s earnings for this year would be more visible given average CPO price achieved up to May 2021 averaging RM4,095/MT vs. RM2,496/MT for the same period last year. The higher realized price in 2021/22 against 2020 should see plantation segment fetching better margins in FY21 and FY22. Nonetheless, we remain cautious that earnings could be affected by high operational costs and possible lower than-expected production and sales volume – with labour issue remaining as a key concern when the sector enters high production season in Sep-Nov. On the other hand, there might be margin contraction for downstream players as demand and price (feedstock and selling price) concerns heighten. However, we estimate that higher revenue and better margins expected from oleochemical division, would partially cushion earnings volatility in downstream segment.

OVERWEIGHT the sector

We maintain average CPO forecast for 2021 of RM2,950/MT and RM2,700/MT for 2022. Our base case scenario is for CPO prices to continue their upward trajectory in the short-term – due to tighter supplies and improved demand as discussed earlier – and then moderate in the later part of 3Q21. In view of this, we expect plantation companies’ earnings to remain firmly on an uptrend, particularly for 2Q21.

Following the impressive 1Q21 corporate earnings season, we upgrade our call on plantation sector to OVERWEIGHT from NEUTRAL as most stocks under coverage are currently carrying attractive valuations. We have BUY call on HAPL (RM2.17), SOP (RM4.50), IOI (RM4.80), KLK (RM24.40) and SIME Darby Plants (TP: RM5.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), TSH (TP: RM1.23), GENP (TP: RM9.00) and FGV (TP: RM1.30); and non-rated for TH Plant.

Variances in earnings forecast would be due to lower-than-expected production, lower-than-expected ASP realised of palm products and higher-than-expected costs. Risk factors include 1) lower-than expected demand, 2) weakening of crude oil prices, and 3) unforeseen market changes i.e., prolong Covid-19 pandemic and movement restrictions.

Source: BIMB Securities Research - 3 Jun 2021