We believe the average 2019 CPO price will come in lower than last year’s average CPO price of RM2,230/tonne due to longer term concerns. Given our less than sanguine view on CPO price over the longer term, we lower our 2019- 2020 average CPO price assumptions to RM2,100-2,200/tonne. Correspondingly, we lower our core net profit assumptions for plantation companies under our coverage by 2.1-53.6%. TPs of plantation stocks under our coverage were revised, to reflect (ii) the downward revisions in core net profit forecasts, (ii) rollover of valuation base year, and (iii) the switch in our valuation methodologies for upstream plantation players. Maintain our UNDERWEIGHT stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations.

1Q19 results wrap-up – still a disappointing quarter overall. 6 out of 9 plantation companies (namely Genting Plant, Hap Seng Plant, IOI, KLK, Sime Plant and TSH resources) missed expectations, due mainly to lower-than-expected palm oil prices. Integrated players fared better than the pure upstream players, as weaker palm product prices were partly mitigated by sustained earnings contributions from downstream segment.

Near-term CPO prices to edge higher. We believe CPO price may strengthen from the current level in the near term, supported by ASF outbreak in China (which will continue to support high palm oil consumption in China over the near term) and Malaysia government’s recent move to set up a special joint committee to monitor and smooth implementation of B20 biodiesel by 2020 (which will in turn boost palm oil consumption).

…however, longer term concerns remain. We believe the average 2019 CPO price will still come in lower than last year’s average CPO price of RM2,230/tonne (and our projected average CPO price of RM2,300/tonne) mainly on the back of weak CPO price YTD, ongoing trade war between US and China (sparkling concerns on slower global economic activities, hence affecting demand for vegetable oils including palm oil), and EU’s publication of limits on the use of palm oil in biofuels.

Forecasts. Given our less than sanguine view on CPO price over the longer term, we lower our average CPO price assumptions by RM100-200/tonne to RM2,100/tonne in 2019 (from RM2,200/tonne previously) and RM2,200/tonne in 2020. Correspondingly, we lower our core net profit assumptions for plantation companies under our coverage by 2.1%-53.6%, on top of the downward revisions we have made during May-19’s reporting season.

Rating changes. We revise our TPs on plantation stocks by 0%-52.9%, to reflect (ii) the downward revisions in core net profit forecasts, (ii) rollover of valuation base year (to 2020 from 2019), and (iii) the switch in our valuation methodologies for upstream plantation players (i.e. Hap Seng Plantations, IJM Plantations, Sime Darby Plantations, and TSH Resources) to P/B (from P/E earlier). Following the revisions in our TPs, we downgraded our rating on TSH Resources to SELL (from Hold previously). Ratings for other plantation stocks, on the other hand, remain unchanged.

Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations.

Source: Hong Leong Investment Bank Research - 17 Jun 2019