During 3Q18 results, all plantation companies missed expectations, mainly on the back of weaker-than-expected palm product prices. During the quarterly results review, we lowered our net profit forecasts and TPs for all companies under our coverage, but maintained our ratings. We are maintaining our average CPO price projection of RM2,500/tonne for now (pending a review with downward bias in our upcoming sector report). Maintain NEUTRAL stance on the sector. The weak CPO price environment will likely protract into 1Q19, arising from bumper crop (particularly in Indonesia) and the absence of positive demand catalyst.

9 out of 9 below. 9 out of 9 plantations companies which reported their quarterly results in Nov-18, fell short of both ours and consensus expectations (see Figure #1), mainly on the back of weaker-than-expected realised palm product prices.

QoQ – lower realised palm product prices more than offset FFB output recovery. Despite seasonally higher FFB production, 8 out of 9 companies reported weaker performance and this was due mainly to weaker palm product prices. We note that IJMP (which recorded a core net loss of RM9.7m) was the worst performer among the 8 companies that reported weaker performance. Besides lower palm product prices, it was hit by lower FFB output for Malaysian operations (resulting from lingering effect of earlier prolonged dry weather condition) and lower CPO sales volumes at both Malaysian and Indonesian operations.

YoY – dragged by lower prices and output. All reported weaker earnings mainly on the back of lower FFB output (with the exception of Genting Plant, IJMP, KLK and Sime Darby Plant) and realised palm product prices. Besides, we note that several companies were affected by the adoption of new accounting standards (MFRS 141 and 116) since early 2018 (in particular, 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 all companies under our coverage, but maintained our ratings.

Forecast. While we have reflected the weaker-than-expected realised palm product prices YTD in our recent quarterly results, we are maintaining our average CPO price projection of RM2,500/tonne for now (pending a review with downward bias in our upcoming sector report). YTD, CPO spot price has fallen by 28% to RM1,775/tonne, mainly on ample vegetable oil supplies (in particularly, soybean and palm oil) arising from (i) the trade spat between US and China, which has resulted in China switching its soybean import destination from US to other major soybean producing countries, resulting in lower soybean prices, hence dragging prices of palm oil products, and (ii) bumper palm oil crop (mainly from Indonesian estates). The weak CPO price environment will likely protract into 1Q19, arising from bumper crop (particularly in Indonesia) and the absence of positive demand catalyst.

Rating. We maintain our NEUTRAL stance on the sector. We remain less sanguine on the sector’s near term earnings growth prospects (at least until 1Q19), mainly on the current weak CPO price environment.

Source: Hong Leong Investment Bank Research - 10 Dec 2018