Highlights

• Except for KLK (which quarterly results had already been announced on 16 Feb), planters’ quarterly results (4Q CY16) are expected to be released from 21 Feb.

• We believe pure upstream players’ earnings in 4QCY16 will come in stronger, both qoq and yoy . On qoq basis, we believe higher earnings will be driven mainly from higher palm product prices (with prices of CPO and PK increasing by 12.1- 14.1% qoq, see Figures 1-2), which more than offset seasonally lower output (particularly, in Malaysia, see Figure 3). 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 36.5% and 80.5% yoy in 4Q16, via-s-vis a 7.2%% decline in CPO production in Malaysia.
• Drag from downstream margins for integrated players… We believe better upstream earnings will be partly offset by weaker downstream margins (arising from narrower spread between prices of palm olein and CPO, and rising PK prices).

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 RM2,500/tonne for 2017 and 2018 respectively.

Top picks

• For sector exposure, our top picks are Sime Darby (BUY; TP: RM10.06), Hap Seng Plantations (BUY; TP: RM2.83) and CBIP (BUY; TP: RM2.48) .

• 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 Hap Seng Plantations for: (1) Its superior management, evidenced by its above average FFB yield and profitability/hectare of planted landbank; and (2) Strong balance sheet (net cash/share of 13 sen as at 30 Sep 2016).

• We like CBIP for its stable earnings quality (arising from its strong orderbook at both its palm oil engineering and SPV divisions) and strong balance sheet.

Source: Hong Leong Investment Bank Research - 20 Feb 2017