Of the 8 companies which reported their quarterly results in Feb-21, 6 came in above expectation, while the remaining 2 came in within our expectation. During the quarter, most companies under our coverage reported better performance (both QoQ and YoY), due mainly to higher palm product prices. We maintain our CPO price assumption of RM2,700/mt for 2020-2022, with the anticipation that CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will result in more balanced demand-supply dynamics. We maintain our Neutral rating on the sector, as we believe current high CPO price will not sustain over the longer term. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

6 above, 2 within. Of the 8 companies which reported their quarterly results in Feb-21, 6 came in above expectation, while the remaining 2 came in within our expectation (see Figure #1). We note that higher-than-expected realised palm product prices were the key variances against our estimates.

QoQ: Boosted mainly by higher palm product prices. 6 out of 8 companies reported improved QoQ performance, boosted mainly by higher realised palm product prices and seasonally higher FFB output. We note the 27% QoQ decline in FGV’s core earnings in 4Q20 was due mainly to lower FFB output (-22.6%), but partly mitigated by higher palm product prices (CPO: +15.7%; PK: +35.7%), turnaround at sugar segment and lower net finance cost.

YoY: Higher palm product prices more than mitigated weaker FFB output. 7 out of 8 companies reported significantly higher core earnings in 4Q20, and this was boosted mainly by sharply higher palm product prices. As for Hap Seng Plantations, decline in 4Q20 core earnings were due mainly to the absence of investment tax allowance and lower sales volume, but partly mitigated by higher palm product prices.

FFB output. On QoQ basis, companies with higher exposure in Malaysia operations (particularly FGV, IOI and Sime) clocked in lower FFB output in 4Q20, due mainly to labour shortfall (resulted from Covid-19 pandemic, which restricted the entry of foreign labour into the country). Moving forward, we believe labour shortage issue in Malaysia will persist into 1H21, and this will continue to drag planters with higher upstream exposure in Malaysia operations.

Downstream. During the quarter, most integrated players under our coverage (namely IOI, KLK and Sime) saw their downstream margins improving on QoQ basis, and this was due mainly to improving demand sentiment for downstream products (particularly, in European markets). Genting Plantations, on the other hand, saw its downstream earnings contracted further in 4Q20 (on QoQ basis), due mainly to weak demand for biodiesel products.

Forecast. We maintain our CPO price assumption of RM2,700/mt for 2020-2022. YTD, CPO price averaged at RM3,828/mt, we anticipate CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will result in more balanced demand-supply dynamics.

Maintain Neutral. We maintain our Neutral rating on the sector, as we believe current high CPO price will not sustain over the longer term. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

Source: Hong Leong Investment Bank Research - 5 Mar 2021