Highlights

• Quarterly results of plantation companies are expected to be released from 15 Aug onwards.

• For the pure upstream players… We believe most players will report stronger qoq results, driven mainly by seasonally stronger FFB production (details in Figure 2), which more than mitigated lower palm product prices. On yoy basis, we believe higher CPO prices and FFB production (with the exception of FGV and HSP, which reported lower FFB production) will drive upstream planters’ earnings higher.

• KLK… We believe KLK will report weaker qoq results, on the back of weaker palm product prices amidst flattish qoq FFB production growth (+1.4%) and still challenging environment for the downstream segment (affected by weak crude oil price and volatile PK price). Nevertheless, we believe core earnings will come in within our expectation, given the strong results achieved in 1HFY17 and decent FFB production growth (+10.6% in 9MFY17).

• IOI… We believe IOI will report stronger qoq results, as weaker palm product prices will be more than mitigated by a 22% increase in FFB production and improved profitability at the manufacturing segment (as guided in its previous results announcement).

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 average CPO price assumptions of RM2,700/tonne for 2017 and RM2,500/tonne for 2018.

• Despite the recent recovery in palm oil prices, we maintain our Neutral stance on the sector, as we believe recent strength in CPO prices will unlikely sustain into 2018, due to the absence of apparent demand growth catalyst and supply concerns

Top Picks

• For sector exposure, our top picks are Sime Darby (BUY; TP: RM10.06) and United Malacca (BUY; RM7.11) .

• We continue to see value in Sime Darby, backed by its plan to unlock value (via the listing of property and plantation arms by end-2017).

• We continue to like UMB for its: (1) Strong FFB output growth prospects (underpinned by young age profile); (2) Healthy balance sheet; and (3) Decent valuations among peers.

Source: Hong Leong Investment Bank Research - 8 Aug 2017