Out of the 7 companies which reported their quarterly results, 4 came in within our expectation, while the remaining 3 (namely FGV, IOI and Sime Darby Plant) missed our expectations. Lower-than-expected FFB output (which also resulted in higher CPO production cost) was the key culprit to the earnings shortfall (particularly, for FGV and Sime Darby Plant). Compared to 4Q19, we note that realised CPO prices tracked closer to average spot CPO price (reported by MPOB) in 1Q20, indicating that forward sales were minimal during the quarter. We maintain our 2020-2021 average CPO price assumptions of RM2,350- 2,400/mt for now, as we believe it will take time before full-swing demand recovery takes place. Maintain NEUTRAL.

A mixed bag of results – 4 in line and 3 below. 7 out of 9 companies reported their quarterly results (results for CBIP and IJMP were delayed to end-Jun). Out of the 7 companies, 4 came in within our expectation, while the remaining 3 companies (namely FGV, IOI and Sime Darby Plant) disappointed. Lower-than-expected FFB output (which also resulted in higher CPO production cost) was the key culprit to the earnings shortfall (particularly, for FGV and Sime Darby Plant).

QoQ & YoY. During the quarter, the dip in FFB output was more than mitigated by higher CPO selling prices, which has resulted in 4 out of 7 companies reporting better performances (both QoQ & YoY). We note the weaker QoQ and YoY performances reported by FGV, Hap Seng Plant, and IOI were due mainly to their more significant exposure to Sabah operations. Apart from significantly lower FFB output, IOI was impacted from losses registered at its 30%-owned associate (Loders, as a result of provision for doubtful debts and mark-to-market losses for commodity derivatives).

Realised CPO prices. Compared to 4Q19, we note that realised CPO prices tracked closer to average spot CPO price (reported by MPOB) in 1Q20 (see Figure #4), which in turn indicates minimal forward sales during the quarter.

Changes to earnings forecasts, TPs, and stock ratings. During the quarterly results, we tweaked our FY20-21 forecasts and TPs for FGV, Hap Seng Plant, IOI and Sime Darby Plant, mainly to account for lower FFB output and higher CPO production cost assumptions (see Figure #5-6). Post revisions to TPs and share price outperformance, we downgraded our ratings on FGV (from Hold to SELL), Hap Seng Plant (from Buy to HOLD), IOI (from Hold to SELL), and KLK (from Buy to HOLD).

Outlook. Since early-May, CPO spot price has recovered by circa 15% to RM2,378/mt, fuelled by several positive development including (i) easing Covid-19 lockdown measures, (ii) improved business ties between Malaysia and India, (iii) Indonesian government’s commitment on B30 programme, and (iv) Malaysian government’s recent move to exempt export duty on palm oil products (including CPO, CPKO, and RBDCPKO). We maintain our 2020-2021 average CPO price assumptions of RM2,350-2,400/mt for now, as we believe it takes time before full swing demand recovery takes place. Besides, we note current Palm Oil-Gas Oil (POGO) spread remains uneconomically viable for discretionary blending.

Sector rating. We are keeping our NEUTRAL stance on the sector unchanged, as we believe recent positive news flows have already been reflected in our assumptions.

Source: Hong Leong Investment Bank Research - 10 Jun 2020