1Q21 core net profit of RM58.2m (QoQ: -32.7%; YoY: -21.6%) came in below expectations, accounting for only 16.2-18.6% of our and consensus full-year estimates, due to lower-than-expected FFB output and property contribution. We lower our FY21-23 core net profit forecasts by 22.1%, 16.3% and 11.0%, respectively, mainly to account for lower FFB output and property earnings assumptions. We maintain our HOLD rating with a lower sum-of-parts TP of RM8.61 (from RM9.82 previously), post earnings revision and update of valuation parameters.

Missed expectations. 1Q21 core net profit of RM58.2m (QoQ: -32.7%; YoY: -21.6%) came in below expectations, accounting for only 16.2-18.6% of our and consensus full year estimates. Lower-than-expected FFB output and property contribution were the key culprits to the negative earnings surprises.

Exceptional items (EIs) in 1Q21. Core net profit of RM50.8m was arrived after adjusting for (i) RM10.4m fair value gain on bearer plants, (ii) RM0.3m PPE written off, (iii) RM0.2m fair value loss on financial assets, (iv) RM3.0m net forex gain, and (v) RM7.4m deferred tax charge.

QoQ. Core net profit plunged 32.7% to RM58.2m in 1Q21, dragged mainly by lower FFB production (-26.3%) at plantation segment, and losses registered at downstream segment (as a result of lower sales volume). All these were, however, partly moderated by higher palm product prices.

YoY. Core net profit fell 21.6% to RM58.2m in 1Q21, dragged mainly by lower FFB production (-1.8%, arising from production setbacks in Malaysia, but partly mitigated by higher FFB production in Indonesia), lower property earnings, losses at downstream segment (arising from lower sales volume and margin compression as a result of high feedstock costs), as well as higher finance costs.

FFB production guidance of 5% in FY21. Despite having registered a 1.8% decline in FFB production during 1Q21, management is still hopeful to achieve an FFB production growth of circa 5% in FY21 (at lower range of 5-8% guided in previous quarter), as it expects FFB production growth in Indonesia (thanks to additional mature areas and favourable age profile) to more than mitigate flattish FFB production growth in Malaysia operations (arising from replanting activities and lagged impact drought season).

Downstream. Downstream segment recorded an operating loss of -RM8.8m in 1Q21 (vs. operating profit of RM2.5m in 4Q20 and RM11.4m in 1Q20), dragged mainly by lower sales volume (at both refinery and biodiesel sub-segments), due to lower exports demand for biodiesel (arising from unfavourable POGO spread), lower domestic biodiesel sales, and weaker refining margin at refining sub-segment (arising from export duty structure differential between Malaysia and Indonesia). Despite weak demand at downstream segment will likely persist into the subsequent quarters, we believe this will be partly mitigated by improving feedstock production (which will in turn result in better margin, albeit marginally).

Forecast. We lower our FY21-23 core net profit forecasts by 22.1%, 16.3% and 11.0%, respectively, to reflect lower FFB output and property earnings assumptions.

Maintain HOLD, with lower TP of RM8.61. We maintain our HOLD rating with a lower sum-of-parts TP of RM8.61 (from RM9.82 previously), to reflect the downward revision in our core net profit forecasts and updated valuation parameters (following release of FY20 annual report).

Source: Hong Leong Investment Bank Research - 25 May 2021