Planters will likely post a mixed bag of results (on QoQ basis) in their upcoming results. Upstream planters with significant exposure in Malaysia will likely post flat to higher sequential performance in 2Q22, while planters with significant exposure to Indonesian estates will likely post weaker performance in 2Q22, due to export restrictions in Indonesia. Maintain our 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne, and OVERWEIGHT stance on the sector. For exposure, we prefer integrated players such as KLK (BUY; TP: RM26.54) and IOI (BUY; TP: RM4.36) over purer upstream players.

Results preview. Plantation companies will start reporting their quarterly financial results starting from 17 Aug 2022.

QoQ: Expect a mixed bag of results. Planters will likely post a mixed bag of results in their upcoming results. Upstream planters with significant exposure in Malaysia will likely post flat to higher sequential performance in 2Q22, on the back of broadly higher FFB output (with the exception of HAPL) and palm product prices. However, planters with significant exposure to Indonesian estates will likely post weaker performance in 2Q22, as we believe Indonesian government’s export policies would weigh down on sales volume in Indonesia.

Zooming in on selected individual planters: FGV Holdings (FGV). FGV’s core earnings will likely come in higher in 2Q22, on the back of higher FFB output (+16.6%) and higher palm product prices.

Hap Seng Plantations (HAPL). HAPL is the only planter under HLIB’s coverage which reported a QoQ decline in its FFB output. However, we believe lower FFB output will be mitigated by higher palm product prices, hence leading to flattish or marginally higher earnings in its 2Q22 earnings.

IOI Corporation (IOI). IOI’s core earnings will likely come in higher in 2Q CY22, on the back of (i) better performance at upstream segment arising from marginally higher FFB output (+1.9%) and palm product prices, (ii) better performance at downstream segment arising from a recovery in palm refining and fractionation margins, as well as healthy margins at oleochemical sub-segment.

YoY: Higher CPO price to drive 2Q22 performance. Planters will likely register higher YoY upstream earnings in their upcoming results, on the back of significantly higher CPO price (>50%), which more than mitigated (i) higher production cost (arising mainly from higher fertiliser prices), and (ii) lower FFB output (with 5 out of 6 planters under our coverage clocked in lower FFB output, while output data from TSH is unavailable). We note that planters with high exposure of upstream operations in Malaysia will fare better than those with high exposure in Indonesia, due mainly to Indonesia’s export restrictions (since Mar-22) and export tax structure.

Forecasts. CPO price has recovered from its low of RM3,677/mt in mid Jul-22 to RM4,127/mt, bringing its YTD average to RM5,966/mt. While Indonesia’s move to flush out palm oil inventories will likely suppress near term CPO price, the recent severe CPO price decline is overdone, as (i) supply prospects of major vegetable oil remains uncertain; and (ii) demand prospects have turned more favourable, on the back of palm’s improved price competitiveness, low inventory levels among major importing countries, and favourable POGO spread. Hence, we maintain our 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne.

Maintain OVERWEIGHT; integrated players preferred. We maintain our OVERWEIGHT stance on the sector, supported by (i) an anticipated recovery in CPO price; and (ii) commendable valuations. For exposure, we prefer integrated players such as KLK (BUY; TP: RM26.54) and IOI (BUY; TP: RM4.36) over purer upstream players, as earnings of integrated players tend to be better insulated amidst volatile palm product price trend.

Source: Hong Leong Investment Bank Research - 3 Aug 2022