Highlights

• Planters’ quarterly results (3QCY16) are expected to be released from 16 Nov.

• We believe pure upstream players’ earnings in 3QCY16 will come in stronger, both qoq and yoy. On qoq basis, we believe higher earnings will come mainly from higher palm production (CPO production in both Malaysia and Indonesia increased by 19.2% yoy and 17% yoy, see Figure 1) and PK prices (see Figure 2). On yoy basis, we believe lower palm production will be more than offset by higher palm product prices (both CPO and PK), as average prices of CPO and PK rose by 28% yoy and 90% yoy in 3Q16, via-s-vis a 14% yoy decline in CPO production in Malaysia.
• For the integrated players… We believe higher upstream earnings will be partly offset by weaker manufacturing margin (arising from escalating PK raw material cost). For IOI, we believe contribution from the specialty oils and fats sub segment will likely remain weak (and this will in turn further suppress its manufacturing margin, on top of the higher PK raw material cost), as RSPO certification suspension was only lifted since mid-Aug.
• Given our expectation of a improved set of results, we believe results of planters under HLIB’s coverage will come in within our expectations.

Catalysts

• Revisit of weather uncertainties, 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.

• Escalating production cost (particularly labour cost).

Rating

NEUTRAL (↔)

• We maintain Neutral on the sector with unchanged CPO Price assumptions of RM2,400/tonne and RM2,500/tonne for 2016 and 2017 respectively.

Top picks

• For sector exposure, our top picks are Sime Darby (BUY; TP: RM9.00) and CBIP (BUY; TP: RM2.40).

• We like Sime for its improved fundamentals arising from the recent coal price recovery (which will in turn have a positive spillover effect on its industrial division’s earnings), and recent completion of private placement, which has strengthened its balance sheet.

• We like CBIP for its stable earnings quality (strong orderbook at both its palm oil engineering and special purpose vehicle assembly divisions) and strong balance sheet.

Source: Hong Leong Investment Bank Research - 7 Nov 2016