During 1Q18 results, 6 out of 9 plantation companies missed expectations namely (CBIP, FGV, Genting Plant, Hap Seng Plant, KLK and TSH Resources), mainly on higher-than-expected production cost. On QoQ basis, most companies (8 out of 9) reported weaker performance mainly on the back of lower palm product prices and seasonally weaker FFB production. Lower prices aside, several companies adopted new accounting standards (MFRS 141 and 116) for the first time (FGV, Hap Seng Plant, IJM Plant and TSH) and this partly contributed to the earnings decline. During the quarterly results review, we lowered our net profit forecasts for CBIP, FGV, Genting Plant, Hap Seng Plant, KLK and TSH, mainly to account for their weak results. Except for IJMP, SD Plant and United Malacca, TPs for all other companies under HLIB’s universe were adjusted to account for (i) core net profit forecast revisions, and (ii) roll forward of valuation base year. Ratings, on the other hand, remain unchanged.

6 below, 2 within, and 1 above. 6 out of 9 plantation companies (which reported their quarterly results in May-18) missed expectations (CBIP, FGV, Genting Plant, Hap Seng Plant, KLK and TSH Resources), while IOI and SD Plant came in within our expectation. We note that higher-than-expected production cost was the key culprit to the weaker-than-expected set of performance.

QoQ – lower palm product prices and seasonally lower production dragged earnings. During the quarter, 8 out of 9 companies reported weaker QoQ performance mainly on the back of lower palm product prices and seasonally weaker FFB production. IJMP was the only company that reported stronger QoQ earnings and this was due mainly to tax write-back during the quarter.

YoY - mixed results. Despite most companies reporting higher FFB production (with the exception of SDPlant, which FFB production was impacted by aggressive replanting efforts and adverse weather condition in Indonesia), 6 out of 9 companies reported weaker YoY earnings mainly on the back of lower palm product prices.

Some were affected by new accounting standards too. Lower prices aside, we note that several companies adopted new accounting standards (MFRS 141 and 116) for the first time (namely FGV, Hap Seng Plant, IJM Plant and TSH) during the quarter, and this partly contributed to the earnings decline (both YoY and QoQ).

Adjustments to core net profit forecasts and TPs. During the quarterly results review, we lowered our net profit forecasts for CBIP, FGV, Genting Plant, Hap Seng Plant, KLK and TSH by 0-41.7% (see Figure #5), mainly to account for their weak results. Except for IJMP, SD Plant and United Malacca, TPs for all other companies under HLIB’s universe were adjusted (see Figure #6) to account for (i) core net profit forecast revisions, and (ii) roll-forward of valuation base year. Ratings, on the other hand, remain unchanged.

Forecast. We maintain our average CPO price assumption of RM2,500/tonne for 2018 and 2019.

Rating. We maintain our NEUTRAL stance on the sector. We remain less sanguine on the sector’s near term earnings growth prospects, mainly on current weak CPO price environment (in particularly, the pure upstream players).

Source: Hong Leong Investment Bank Research - 11 Jun 2018