Planters will likely register weaker performance (both QoQ and YoY) in their upcoming quarterly results (starting from 22 Nov 2022), on the back of lower palm oil prices. On YoY basis, most planters will likely post a YoY decline in their upstream plantation earnings, on the back of lower FFB output and palm product prices, coupled with higher production cost (arising mainly from full impact of minimum wage hike in Malaysia and higher fertiliser prices). Planters with high exposure of upstream operations in Indonesia will likely fare better than those with high exposure in Malaysia, given the change in export levy structure and possibly higher FFB output. Maintain 2022-24 CPO price assumptions of RM5,050/4,000/3,800 per tonne and Overweight stance on the sector. For exposure, our top picks are KLK (BUY; TP: RM26.80) and IOI (BUY; TP: RM4.65).

Results preview. Most planters within our coverage will likely register weaker performance (both QoQ and YoY) in their upcoming quarterly results (starting from 22 Nov 2022), on the back of lower palm oil prices.

QoQ: Lower CPO price to drag upstream plantation earnings. Upstream plantation earnings will likely come in weaker on QoQ basis, as seasonally higher FFB output (+3.7-26.8%) is offset by significantly lower palm product prices.

Zooming in on selected individual planters:

Kuala Lumpur Kepong (KLK). KLK’s core earnings will likely come in lower in 3Q CY22, as higher FFB output (+26.8%, due mainly to FFB contribution from newly acquired subsidiaries) and inclusion of earnings from 26.3%-owned Synthomer will likely be offset by lower palm product prices, impact from minimum wage hike, and challenging operating environment at downstream segment.

IOI Corporation (IOI). IOI’s core earnings will likely come in lower in 3Q CY22, as the 8.9% FFB output growth will likely be offset by lower palm product prices and potentially weaker contribution from manufacturing segment.

YoY: Lower CPO price and FFB output, and higher production cost to drag upstream plantation earnings. Most planters will likely post a YoY decline in their upstream plantation earnings, on the back of lower FFB output (with only 1 out of 7 planters under our coverage registered positive FFB output growth) and palm product prices, coupled with higher production cost (arising mainly from full impact of minimum wage hike in Malaysia and higher fertiliser prices). Planters with high exposure of upstream operations in Indonesia will likely fare better than those with high exposure in Malaysia, given the change in export levy structure and possibly higher FFB output. As for the integrated players, volatile feedstock prices, coupled with elevated freight cost will likely hinder profitability at downstream segment.

Forecasts. Maintain 2022-24 CPO price assumptions of RM5,050/4,000/3,800 per tonne. We believe CPO price will sustain at above RM4,000/mt over the next few months (possibly until 1Q23), and start trending down from 2Q23 onwards, on the back of (i) better supply visibility for vegetable oils (arising from easing labour shortage in Malaysia and absence of weather anomalies), (ii) heightened risk of global recession, and (iii) inventories built up in key palm oil importing countries.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector, supported by commendable valuations and high near-term CPO prices. For exposure, our top picks are KLK (BUY; TP: RM27.27) and IOI (BUY; TP: RM4.65)

Source: Hong Leong Investment Bank Research - 16 Nov 2022