Based on our estimates, pure upstream plantation companies under our coverage (namely FGV, HSP, IJMP and TSH) will likely report better YoY performances in their upcoming quarterly financial results, due to higher FFB production and CPO selling prices. On QoQ basis, most plantation companies under our coverage to report weaker QoQ performance, as higher FFB output was insufficient to mitigate lower CPO selling prices. Results preview aside, we are keeping our average CPO price projections of RM2,350-2,400/mt in 2020-21, and Neutral stance on the sector unchanged. For exposure, our top picks are IJM Plantations (BUY; TP: RM1.78) and TSH Resources (BUY; TP: RM1.12).

Results preview. Plantation companies will start reporting their quarterly financial results starting from next week.

YoY – Pure upstream players to benefit from higher FFB output and CPO selling prices. Pure upstream plantation companies under our coverage (namely FGV, HSP, IJMP and TSH) will likely report better YoY performances, due to higher FFB production and CPO selling prices. For the integrated players (including KLK, IOI and Sime), we believe stronger performance at upstream segment will be offset by potentially weaker performance at downstream segment (arising from lower margin and demand).

Genting Plant will likely report weaker results in 2Q20, as higher CPO selling prices may be more than offset by weaker FFB output (-2.9% YoY), and performance at property segment and premium outlets (on the back of MCO).

QoQ – higher FFB output insufficient to mitigate weaker CPO selling prices. Except for FGV and IOI, we expect most plantation companies under our coverage to report weaker QoQ performance, as higher FFB output was insufficient to mitigate lower CPO selling prices (during the quarter, MPOB’s reported average CPO price declined by 14.9% to RM2,281/mt). As for the integrated players (including KLK, IOI and Sime), we expect weaker performance at upstream segment will be offset by stronger performance at downstream segment (on the back of higher margin and demand).

Among the plantation companies under our coverage, we note that FGV and IOI reported significantly higher FFB output in 2Q20 (which FFB output increased by 67% and 37%, respectively).

Weaker upstream performance aside, we believe Genting Plantation’s performance may be dragged further by weaker at property segment and premium outlets (on the back of MCO).

Results preview aside… Despite recent strong CPO price performance (which has brought YTD average to RM2,485/mt), we maintain our average CPO price projections of RM2,350-2,400/mt in 2020-21, as current CPO price may not sustain into the next few months, due to several reasons including (i) palm’s narrow price discount (~US$40/mt) against the soyoil, which caps further upside to CPO price, (ii) feasibility of discretionary biodiesel blending remains inexistent, (iii) pent-up demand from key importing countries (in particularly, India) may start easing soon (if its monthly edible oil inventory is a guide), and (iv) anticipated pick up in palm supply in 2H 2020.

Stay Neutral. We maintain our Neutral stance on the sector, given our view of weaker near-term price prospects. For exposure, our top picks are IJM Plantations (BUY; TP: RM1.78) and TSH Resources (BUY; TP: RM1.12).

Source: Hong Leong Investment Bank Research - 13 Aug 2020