• It was a remarkable 1Q22 earnings season with 8 out of 10 companies under our coverage beating our forecast.

• Attractive plantations’ segment margins may sustain in the upcoming results seasons, given higher ASP of palm products - sufficient to compensate for lower production and increase in operating costs.

• Maintain OVERWEIGHT call on the sector with an average CPO price forecast of RM5,000/MT for 2022 and RM3,500/MT for 2023. We continue to hold the view that earnings to remain encouraging this year amid CPO price that is expected to trade above RM6,000/MT in the short-to-medium term.

Encouraging Performance for 1Q2022

The recently concluded corporate earnings season was remarkable for plantation companies as eight out of ten stocks under our coverage reported earnings that were above expectations, with two within our expectations i.e., GENP (Buy; TP: RM9.57) and KLK (Buy: TP: RM28.40). Earnings were generally higher on a yoy basis as higher ASP of palm products realised negated the decline in production and increase in operational costs - except for IOI (Buy: TP: RM5.00), KLK (Buy: TP: RM28.40, FGV (Hold: TP: RM1.82) and Hap Seng Plant – HAPL (Hold: TP: RM2.90) which recorded a higher yoy growth in FFB and CPO productions. Expansion in margins and profit from the downstream manufacturing segment aided better results for KLK, SIME Plant (Buy: TP: RM5.70), FGV and GENP. The average selling price realised of CPO for companies under our coverage improved significantly ranging between RM4,378/MT – RM6,308/MT in 1Q22 against RM2,997/MT – RM3,885/MT in 1Q21 and RM4,007/MT – RM5,468/MT in 4Q21.

Conversely, adjusted for non-cash items, almost all companies under our coverage recorded a weaker qoq performance except for SOP (Hold; TP: RM6.16) and SIME Darby Plant (Table 2). This was mainly due to the higher ASP of palm products during the period that was insufficient to compensate for the lower FFB productions, higher operational costs and lower contributions from downstream segments.

A Seasonal q-o-q Decline in 1Q22 FFB Production… In 1Q22, all companies recorded a q-o-q decrease in FFB production with the drop ranging from 11% to - 28%, due to seasonal decline as well as the still-high production levels in 4Q21. The lower FFB production was mainly due to lower crops as production is on the low cycle of production months in January and February, compounded by the flooding situation in some states in Malaysia and Indonesia which is within crops growing areas that disrupted the harvesting and logistics of PO, as well as hiccups in productivity due to labour shortage issues and replanting activities (Table 3). The anomaly was TSH (Hold; TP: RM1.55) where the FFB production increased by 0.8% qoq thanks to expansion in production from Indonesian estates as more planted areas coming into maturity and harvesting due to a better age profile.

Earnings Growth Outlook in 2Q22 Firmly Entrenched on the Upside

We continue to believe that the sustainability of higher palm oil prices depends on the magnitude of depth and length of the Russia-Ukraine geopolitical war, the current and future state of global economic conditions, weather conditions and the export policy of vegetables oil-producing countries. Although CPO price may soften in the 2nd half of 2022 on improving in vegetable oils supply outlook, we believe this is inconsequential. The labour shortage issue in Malaysia is expected to be resolved only in 3Q22, as recently, the first batch of plantation workers from Indonesia was barred from departing for Malaysia – hence, hindering planters in Malaysia to optimise their production this year and such, the tight supply of PO situation.

The visibility of Plantation’s sector earnings this year could be capped by higher operating costs i.e., an increase in minimum wages, higher fertiliser costs, higher energy costs and higher recruitment costs, to name a few. Nonetheless, we expect 2Q22 earnings to be more encouraging on a qoq/yoy basis given higher average CPO price achieved as of April-May 2022 averaging at RM6,775.50/MT vs. RM4,396/MT for the same period last year and RM6,051/MT in 1Q22. Improved demand prospects, tighter inventory level and supply of vegetable oils could push CPO prices higher and thus, bolstering prices in the short-to-medium term before moderating in the 3Q2022 during the high production seasons. Although we might see margin contraction to continue for downstream players on demand and price (feedstock and selling price) concerns, the higher average selling price realized for CPO in 2022 against 2021 should see the plantation segment fetching better margins for this year – thus, negating the hiccup in downstream segments as well as an anticipated increase in production costs and operational costs on the back of slower growth in FFB and CPO production in upstream segments. However, we believe that higher revenue and better margins expected from the oleochemical division would negate or partially cushion the earnings volatility in the downstream segment.

OVERWEIGHT Call on the Sector

Maintain an Overweight call on the sector with an average CPO price forecast for 2022 of RM5,000/MT and RM3,500/MT for 2023. Our base case scenario is for CPO prices to continue their upward trajectory in the short-to-medium term – due to the factors discussed earlier – before moderating in the later part of 3Q22 which coincides with higher PO production months. In view of this, we expect plantation companies’ earnings to remain firmly on the upside for the upcoming results. We have a BUY call on IOI (TP: RM5.00), KLK (TP: RM28.40), SIME Darby Plants (TP: RM5.70), GENP (TP: RM9.57) and Sarawak Plant (TP: RM3.64), with a HOLD recommendation for FGV (TP: RM1.82), HAPL (TP: RM2.90), SOP (TP: RM6.16), and TSH (TP: RM1.55); and non-rated for TH Plant.

Risk factors would include 1) slower-than-expected economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) unprecedented events i.e., prolonged Covid-19 pandemic with a new variant and another round of movement restriction worldwide, and Russia-Ukraine geopolitical tension.

Source: BIMB Securities Research - 7 Jun 2022