During 2Q18 results, 6 out of 9 plantation companies missed expectations namely (namely FGV, Hap Seng Plant, IJM Plant, IOI Corp, KLK and TSH), mainly on lower-than-expected FFB output (in particularly, from Malaysian estates) and palm product prices. During the quarterly results review, we lowered our net profit forecasts and TPs for FGV, Hap Seng Plant, IJM Plant, IOI Corp, KLK and TSH to account for their weak results. Except for Hap Seng Plant (which was downgraded from Buy to HOLD) and IJM Plant (which was downgraded from Hold to SELL), ratings for all other companies remain unchanged. Maintain Neutral stance on the sector.

3 in line, 6 below. Only 3 out of 9 plantations companies (which reported their quarterly results in Aug-18) came in within expectations (CBIP, Genting Plant, and Sime Darby Plant), while the remaining 6 missed our expectations (namely FGV, Hap Seng Plant, IJM Plant, IOI Corp, KLK and TSH). We note that lower-than-expected FFB output (in particularly from Malaysian estates) and palm product prices were the key culprits to the weak set of performance.

QoQ – lower palm product prices and FFB output dragged earnings. During the quarter 6 out of 9 companies reported weaker QoQ performance mainly on the back of lower FFB output (in particularly, those who have exposure in Malaysia), and lower palm product prices. We note it was unusual for plantation companies to register QoQ decline in FFB output during 2Q, and we understand that the QoQ decline was due mainly to lingering effect of El Nino episode, which has in turn resulted in a shift in cropping patterns in some planted areas (particularly, in Malaysia).

YoY – 8 out of 9 companies reported weaker earnings. 8 out of 9 companies reported lower YoY earnings mainly on the back of lower FFB output (with the exception of Genting Plant and KLK, which FFB output grew by 5% and 0.5% respectively) and lower realised palm product prices. KLK was the exceptional, which reported a 22% increase in core net earnings (as weaker plantation earnings were mitigated by lower CPKO price and absence of inventory write-down, which have in turn lifted manufacturing earnings considerably). Besides, we note that several plantation companies were affected by the adoption of new accounting standards (MFRS 141 and 116) since early 2018 (in particularly, Hap Seng Plant, IJM Plant and TSH).

Adjustments to core net profit forecasts and TPs. During the quarterly results review, we lowered our net profit forecasts and TPs for FGV, Hap Seng Plant, IJM Plant, IOI Corp, KLK and TSH (see Figure #5) mainly to account for their weak results. Except for Hap Seng Plant (which was downgraded from Buy to HOLD) and IJM Plant (which was downgraded from Hold to SELL), ratings for all other companies remain unchanged (see Figure #6).

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 - 7 Sept 2018