Highlights

• Among the 9 plantation companies under our coverage, 5 beat our expectations (namely, Genting Plant, Hap Seng, Plant, IJM Plant, IOI and KLK). TSH came in within our expectation, while CBIP, FGV and Sime Darby missed our expectations.

• QoQ… Most companies (8 out of 9) reported better qoq performance and this was due mainly to better palm product prices and FFB output recovery (mainly from Indonesian operations).

• YoY… Although most companies reported lower FFB output, 8 out of 9 companies managed to post better yoy performance, and this was due largely to better palm product prices, which more than mitigated lower FFB output (arising from lagged impact of El Nino).

• Changes in net profit forecasts and TPs… During review of quarterly results, we raised core net profit forecasts and TPs for 6 out of 9 companies under our coverage (namely FGV, Genting Plant, Hap Seng Plant, IJM Plant, IOI, and KLK), largely to account for higher FFB output assumptions. We raised our FY17-18 core net profit forecasts for FGV largely to reflect the absence of replanting expenditure, which more than mitigated a lower FFB yield assumption and earnings assumptions at MSM. For Sime Darby, we lowered our FY17-18 core net profit forecasts to account for lower property earnings assumption. However, recommendation remained unchanged.

• Moving into 2017… We reiterate our stance that CPO output from both Indonesia and Malaysia (which collectively account for more than 80% of the global palm oil output) has seen its worst and is on track to recover.

• We maintain our average CPO price assumption of RM2,500/tonne for 2017 (lower than average CPO price of RM2,640/mt in 2016), on the back of the anticipated recovery in CPO output, ample supplies of soybeans globally and the absence of strong demand catalyst.

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 (particularly labour cost).

Rating

NEUTRAL ( ↔ )

• We maintain our Neutral stance on the sector, as we believe our anticipation of palm oil production recovery will be offset by lower CPO prices (given the lack of demand growth catalyst).

Sector View

• We maintain Neutra l on the sector. For exposure, our top picks are Sime Darby (BUY; TP: RM10.06) , Hap Seng Plantations (BUY; TP: RM2.89) and CBIP (BUY; TP: RM2.48)

Source: Hong Leong Investment Bank Research - 7 Mar 2017