Based on our estimates, pure upstream plantation players under our coverage will likely report better 3Q20 performances (on QoQ basis), on the back of higher average CPO price and FFB output (except for IJMP and SD Plant, which reported weaker QoQ FFB output). Results preview aside, while we are still holding the view that current high CPO price will unlikely sustain into the remaining months of 2020, although full year average price will likely come in higher than our assumption of RM2,350/mt; possibly averaging RM2,550-RM2,600/mt for 2020. We maintain our average CPO price projections of RM2,350-2,400/mt in 2020-21 and Neutral stance on the sector for now, pending a further review on the sector. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

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

QoQ – Pure upstream players to benefit from higher FFB output and CPO prices. Pure upstream plantation players under our coverage will likely report better 3Q20 performances (on QoQ basis), on the back of higher average CPO price (which has surged by circa 20% from 2Q20) and FFB output (for most of the plantation players, except for IJMP and SD Plant, which reported weaker QoQ FFB output). For the integrated players, stronger performance at upstream segment will likely be partly offset by potentially weaker performance at downstream segment (due mainly to higher feedstock costs).

Among the plantation companies under our coverage, we note that FGV and HS Plant reported notably higher FFB output in 3Q20 (by 13.2% and 14.2%, respectively).

YoY – Higher CPO prices to offset mixed FFB output performance. Pure upstream plantation players will likely report better 3Q20 performances (on YoY basis), as higher average CPO price (which increased by >30% in 3Q20) will more than mitigate mixed FFB output performance among the pure plantation players under our coverage. Integrated players, on the other hand, will likely see better performance at upstream segment being weighed down by weaker performance at downstream segment (arising from high feedstock cost and weaker demand).

On FFB output front, only 3 out of 9 plantation players under our coverage clocked in higher FFB output (namely, FGV, HS Plant and IOIC), while the remaining 6 plantation companies reported lower FFB output (which ranges from 0.5-9.4% YoY) due mainly to their exposure in Indonesia (which was in turn, dragged by rolling impact of drought in previous years).

Results preview aside… CPO price recent extended its gain to as high as RM3,300/mt and averaged at RM2,610/mt YTD, boosted mainly by (i) a rally in soybean price (triggered by weather concerns), and (ii) concern on palm oil supply shortfall in Malaysia and Indonesia. While we are still holding the view that current high CPO price will unlikely sustain into the remaining months of 2020, full year average price will likely come in higher than our assumption of RM2,350/mt; possibly averaging RM2,550 - RM2,600/mt for 2020. Pending a further review on the sector, we keep our assumptions for now at RM2,350-2,400/tonne in 2020-21.

Forecast. Maintain for Now, Pending the Actual Results Outcome.

Stay Neutral. We maintain our Neutral stance on the sector for now, pending a review on our CPO price assumptions in 2020-2021. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

Source: Hong Leong Investment Bank Research - 5 Nov 2020