Of the 8 planters we track, 6 came in above expectation, while the remaining 2 were within our expectation. During the quarter, all plantation players under our coverage registered significantly higher core earnings on YoY basis, boosted mainly by sharply higher palm product prices. Maintain 2022-24 CPO price assumptions of RM5,500/4,500/4,500 per tonne and OVERWEIGHT stance on the sector. Top picks are FGV, IOI Corp, KLK, and Sime Darby Plantation.

6 above, 2 within. Of the 8 companies which reported their quarterly results in May- 22, 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: Mostly Lower on Seasonally Weaker FFB Production

Except for FGV and KLK, all other planters registered lower core earnings in 1QCY22, dragged mainly by seasonally lower FFB output, but partly mitigated by higher realised palm product prices. Among the 8 planters under HLIB’s tracking, FGV registered the highest core earnings growth, and this was boosted mainly by higher realised CPO price and lower net LLA charge (but partly moderated by a 21.6% decline in FFB output).

Downstream segment. During the quarter, 3 out of 4 integrated players we track (namely, Genting Plantations, IOI and Sime Darby Plantation) registered a QoQ decline in their downstream contributions, dragged mainly by lower sales volume and margin compression (arising from high input costs).

YoY: Boosted mainly by significantly higher realised palm product prices

All plantation players under our coverage registered significantly higher core earnings in 1QCY22, boosted mainly by sharply higher palm product prices.

FFB output. Despite persistent labour shortage in Malaysia, 4 out of 7 planters (namely FGV, HSP, IOI and KLK) managed to register positive FFB output growth, and this was due mainly to more favourable weather condition in Sabah.

Downstream segment. Among the 4 integrated planters under our coverage, only IOI registered a decline in its downstream contribution, and this was dragged mainly by lower contribution from its associate Loders (resulted mainly from higher input costs and USD9m loss on derivative financial instruments, but partly mitigated by improved sales volume).

Forecast. After reaching its all-time-high of RM8,076/mt in early Mar-22, CPO price moderated to ~RM6,700/mt recently and averaged at RM6,400/mt YTD. We expect palm oil prices will remain at elevated levels for a while, supported by supply disruption of major vegetable oil arising from less favourable weather conditions, geopolitical tension, and protracted fertiliser supply. We maintain our 2022-24 CPO price assumptions of RM5,500/4,500/4,500 per tonne.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects), (ii) easing ESG concerns, and (iii) decent valuations. Top picks remain FGV (BUY; TP: RM2.53); IOI Corp (BUY; TP: RM5.07), KLK (BUY; TP: RM34.16) and Sime Darby Plantation (BUY; TP: RM6.06).

Source: Hong Leong Investment Bank Research - 8 Jun 2022