Highlights

• Expect mixed set of results for 4Q15. TSH and Genting Plantation (GENP) are likely to report better qoq performance on the back of better FFB production growth of 30.8% (+27.0% yoy) and 6.7% (+5.5% yoy) respectively. On the other hand, IJM Plantation’s performance is likely to be affected by the weaker production growth.

• Weak production from Sabah’s estates. Plantation companies with large exposure in Sabah have reported much weaker production growth as compared to others. However, TSH and GENP reported better production growth due to the production growth coming from their Indonesia estates with younger ago profile.

• Better qoq CPO ASP for Malaysia. MPOB reported 5.5% qoq (-0.8% yoy) improvement in CPO ASP for 4Q15. This would help to mitigate the decline in CPO production due to dry weather. However, companies with Indonesia operation would continue to be affected by the US$50/tonne export tax levy. Indonesia average CPO price for 4Q15 was down 3.5% qoq (-20.6% yoy) to Rp6,846/kg.

• Potential unrealized forex gains in 4Q15. Indonesia Rupiah and Ringgit Malaysia have strengthened by 5.9% and 2.3% qoq respectively against the US dollar in 4Q15. Companies with US dollar debt exposure are likely to report translation gains from the currency appreciation in this quarter.

• Marginal impact from foreign worker levy hike. Government has announced foreign worker levy hike to RM1,500/worker from RM590/worker previously effective on 1 Feb 2016. Our calculation shows that the impact on plantation companies is marginal (about 1-3% of net profit) and we are maintaining our earnings forecast.

Catalysts

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

• Severe-than-expected El Nino impact on FFB yield.

Risks

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

Rating

NEUTRAL

• We maintain Neutral on the sector with unchanged CPO Price assumption of RM2,400/tonne for 2016.

Positives

• Long term sector outlook remains favourable.

Negatives

• Weak demand and high inventory in near term.

Top picks

• CBIP (BUY; TP: RM2.30)
• Genting Plantations (BUY; TP: RM11.75)

Source: Hong Leong Investment Bank Research - 3 Feb 2016