Based on our estimates, most planters will likely report sequential QoQ growth in their upcoming results, on the back of higher palm product prices and FFB output. We believe plantation players with larger exposure in Indonesia (such as GENP, IJMP and TSH) will post bigger increases in their realised CPO prices in 3Q21, due to the revised CPO levy structure in Indonesia. Results preview aside, we raise our 2021-23 CPO price assumptions to RM4,250/3,500/2,900 per tonne (vs. RM3,800/2,900/2,800 per tonne previously). Earnings forecasts and TPs on individual planters (to reflect high CPO price, production cost and lower output assumptions) will be adjusted in the upcoming results season. Maintain Overweight stance on the sector. Top picks are IOI Corp (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), Sime Darby Plantation (BUY; TP: RM4.99) and TSH Resources (BUY; TP: RM1.31).

Results preview. Plantation companies will start reporting their quarterly financial results starting from mid-Nov.

QoQ. Most planters will likely report sequential QoQ growth in their upcoming results, on the back of higher palm product prices and FFB output (with 5 out of 8 companies registered higher FFB output in 3Q21). We believe plantation players with larger exposure in Indonesia (such as GENP, IJMP and TSH) will post bigger increases in their realised CPO prices in 3Q21, as the revised CPO levy structure in Indonesia (effective 2 Jul 2021) will result in bigger gains in realised CPO prices there vs Malaysia. Zooming in on selected individual planters:

Genting Plantations (GENP). GENP will likely report flattish QoQ performance, as higher palm product prices will be offset by (i) higher fertiliser cost (as we understand that GENP only achieved circa 40% of its full-year fertiliser requirement in 1H21), (ii) a 0.8% QoQ decline in FFB output, and (iii) weak JV contribution (we believe interstate travel ban and border closure will continue to hit earnings at both Johor Premium Outlets and Genting Highlands Premium Outlets in 3Q21), and (iv) potentially weaker downstream performance (arising from high feedstock costs).

IJM Plantations (IJMP). IJMP’s performance will likely report sequential improve performance in its upcoming quarterly results, driven by higher palm product prices and a 10% QoQ increase FFB output.

Sime Darby Plantations (SDPL). SDPL will likely report flattish QoQ performance in 3Q21, as higher palm product prices and sustained performance at downstream segment will likely be moderated by (i) higher fertiliser cost, and (ii) lower FFB output (due mainly to lower output from Malaysia estates, we believe).

TSH Resources. Despite the 6.3% QoQ decline in FFB output, we believe TSH’s upcoming earnings will still come in higher (on QoQ basis), as lower FFB output will be more than mitigated by higher palm product prices and gradual recovery in cocoa butter ratio in Europe.

YoY. We believe most plantation players will report better 3Q21 performance, as significantly higher CPO price (which increased by >60% in 3Q21) will more than mitigate lower FFB output. As for the integrated players, while higher feedstock costs will hurt margin at downstream segment, this will likely be mitigated by improved demand for downstream products (following the gradual reopening of economies). During 3Q21, only 2 out of 8 plantation players clocked in higher FFB output during 3Q21 (namely IJMP and TSH Resources), while the remaining 6 plantation companies reported lower FFB output (with declines ranging 1.7-16.7% YoY), due mainly to arising from labour shortage in Malaysia, and less favourable weather condition in Indonesia.

2021-2023 CPO price assumptions raised to RM4,250/3,500/2,900. CPO price strength continues into Oct-21, reaching to an all-time-high of RM5,45/tonne (bringing YTD average to RM4,276ni palmoil/tonne). While we remain doubtful of the sustainability of current CPO price (at >RM5,000/tonne) over the longer term, we believe CPO price will still stay lofty in the near term on the back of (i) near-term supply constraints, and (ii) increasing likelihood of La Nina episode by Nov-21 (which will lend support to vegetable oil prices, if history is a guide). We believe a more noticeably decline in CPO price will happen when supplies of vegetable oils (in particular, palm oil and soybean) start showing signs of recovery (possibly by 2Q22). We raise our 2021- 23 CPO price assumptions to RM4,250/3,500/2,900 per tonne (vs. RM3,800/2,900/2,800 per tonne previously).

Maintain earnings forecasts and TPs for now… We will only adjust earnings forecasts and TPs on individual planters (to reflect high CPO price, production cost and lower output assumptions) in the upcoming results season.

Reiterate OVERWEIGHT. We reiterate our Overweight stance on the sector, supported by good near-term earnings prospects (arising from elevated CPO prices). Our preferred BUYs are IOI Corp (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), Sime Darby Plantation (BUY; TP: RM4.99) and TSH Resources (BUY; TP: RM1.31).

Source: Hong Leong Investment Bank Research - 8 Nov 2021