6 out of 8 planters which reported their quarterly results in Aug-22 met our expectations. On a YoY basis, 8 out of 9 planters registered higher core net profit, driven mainly by significantly higher CPO price realised (but partly moderated by lower FFB output and higher CPO production cost). Maintain 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne, and OVERWEIGHT stance on the sector. For exposure, our top picks are IOI and KLK.

Mostly within. 6 out of 8 planters which reported their quarterly results in Aug-22 met our expectations, while SDPL missed expectation (due mainly to weaker-than-expected FFB output in Malaysia operations) and IOI beat expectation (due mainly to better-than expected showing at manufacturing segment).

QoQ: Mostly higher on higher CPO price realised and seasonally higher output. 5 out of 8 planters reported higher core earnings during 2Q22, due mainly to higher realised CPO prices and seasonally higher FFB output. Among the 8 planters under our tracking, Genting Plantations recorded the highest QoQ core net profit growth (which more than doubled to RM218m from RM96m in preceding quarter), boosted mainly by higher CPO price realised and FFB output at upstream plantation segment, and margin expansion at downstream segment.

During the quarter, 3 out of 4 integrated players we track (namely Genting Plantations, IOI, and Sime Darby Plantation) registered significant jump in their downstream contributions, boosted mainly by margin expansion at refinery sub-segment. KLK, on the other hand, saw its downstream contribution falling by 42% QoQ, as better performance at oleochemical sub-segment was more than offset by losses suffered by refineries and kernel crushing sub-segments (arising from the implementation of DMO in Indonesia).

YoY: Boosted mainly by higher realised palm product prices. Except for CBIP, all other planters registered higher core net profit, driven mainly by significantly higher CPO price realised (but partly moderated by lower FFB output and higher CPO production cost). Except for KLK (which FFB output growth was distorted by contribution from newly acquired subsidiaries), all planters reported lower FFB output due to acute labour shortage in Malaysia operations. All integrated players under our coverage registered higher downstream contribution during 2Q22, due mainly to margin expansion (arising from lower feedstock prices).

Weaker quarters ahead. We anticipate planters to register weaker earnings in subsequent quarters, on the back of lower palm product prices and weaker demand sentiment (which will likely affect demand for downstream products).

Forecast. Maintain 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: RM26.80) and IOI (BUY; TP: RM4.65) 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 - 8 Sept 2022