1Q21 core net profit of RM437m (QoQ: +16%; YoY +258%) came in within our expectation, accounting for 25.7% of our full-year estimate. We tweak our FY21- 23 core net profit forecasts by -3.8%, 2.2%, and 0.9%, respectively. We raise our sum-of-parts TP marginally to RM5.05 (from RM5.02 earlier, as we updated our valuation parameters and tweaked our earnings forecasts), and upgrade our rating to BUY (from Hold earlier), as valuation has become more palatable following recent share price underperformance.

Within our expectation. 1Q21 core net profit of RM437m (QoQ: +16%; YoY +258%) came in within our expectation, accounting for 25.7% of our full-year estimate. Against the consensus, the results accounted for 32.4% of consensus full-year estimate (above).

Exceptional items in 1Q21. Core net profit of RM437m in 1Q21 was arrived after adjusting for (i) RM13m fair value losses, (ii) RM124 disposal gain, (iii) RM2m net impairment, (iv) RM32m unrealised forex losses, (v) RM14m write-off, and (vi) RM62m fair value changes on biological assets.

QoQ. Core net profit surged 16% to RM437m in 1Q21, boosted mainly by higher realised palm product prices, which more than mitigated lower FFB output and weaker downstream performance (which was dragged by lower earnings reported by the Asia Pacific region).

YoY. Core net profit surged 258% to RM437m in 1Q21 (from RM122m SPLY), boosted mainly by significantly higher realised palm product prices, improved FFB output and improved downstream performance (driven by market price uptrend and premium from RSPO products in Asia Pacific region, and improved profitability at refinery sub segment in Europe and Africa). Despite realised palm product prices were much higher, operating profit at upstream segment in Malaysia declined by 44% (to RM244m) in 1Q21, and this was dragged mainly lower FFB output and OER (as a result of labour shortfall), as well as the absence of unrealised fair value gain on commodity hedges.

FFB output. FFB output grew by 4% YoY to 2.2m tonnes in 1Q21, as crop recovery in Indonesia (+20%) more than mitigated lower FFB output in Malaysia (-2%, as a result of labour shortage). Management shared that labour shortage in Malaysia will likely be protracted into the next few months, which will in turn continue to drag FFB output contribution from Malaysia operations. Nevertheless, lower FFB output contribution from Malaysia will be more than mitigated by higher FFB output in Indonesia and PNG (on the back of output recovery).

Forward sales. Management shared that it has locked at ~80% of its budgeted CPO production in Malaysia at CPO price of circa RM3,030/tonne for FY21.

Forecast. We tweak our FY21-23 core net profit forecasts by -3.8%, 2.2%, and 0.9%, respectively, as we recalibrated our earnings model following the release of annual report.

Upgrade to BUY with higher TP of RM5.05. We raise our sum-of-parts TP marginally to RM5.05 (from RM5.02 earlier, as we updated our valuation parameters and tweaked our earnings forecasts), and upgrade our rating to BUY (from Hold earlier), as valuation has become more palatable following recent share price underperformance (-13.9% since 6 months ago).

Source: Hong Leong Investment Bank Research - 27 May 2021