Highlights

• Integrated players outperformed pure upstream players. Most pure upstream plantation companies reported weaker set of results dragged by lower CPO ASP despite better FFB production growth. On the other hand, integrated player reported better performance from downstream operation which partly helped to mitigate the weaker upstream business.

• Disappointing quarter with majority of the plantation companies reported weaker than expected results in 3Q15 except for Kuala Lumpur Kepong (KLK) and IOI Corporation (IOI) which reported results that were in line with our expectations (see Figure 1). Sime Darby’s (Sime) results were also dragged by the underperformed industrial and motor divisions that suffered from slowdown in economy and weakening ringgit.

• Better production growth in 3Q15. Most plantation companies reported better yoy production in 3Q15 except for Sabah based players (see Figure 2 & 3). IJM Plantations (IJMP) and TSH Resources (TSH) reported yoy decline of 10.4% and 8.1% respectively in FFB production for their Sabah estates, likely due to the lagged impact from dry weather in 1Q15.

• Lower CPO ASP. All companies reported lower qoq and yoy CPO ASP in 3Q15 (see Figure 4). However, companies with Indonesia exposure such as Genting Plantation, IJMP, KLK, TSH and Sime reported sharper decline in CPO ASP due to dilution from lower ASP in Indonesia with the implementation of palm oil export levy of US$50/tonne in July 15.

• Outlook for 4Q15. We are expecting better performance in 4Q15 supported by the recovery in CPO prices. According to MPOB, CPO local delivery average price in Oct and Nov 15 is up by 5.7% since 3Q15. Besides that, production is likely to peak in Oct 15, before entering into seasonally low production period, which would help to support production in 4Q15.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.
• Escalating production cost (in particularly, labour cost).

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable.

Negatives

• High inventory level cap near term CPO price.

Top picks

• CBIP (BUY; TP: RM2.10)

Source: Hong Leong Investment Bank Research - 7 Dec 2015