4 out of 8 planters under our coverage met our expectations. On YoY basis, most planters reported lower core net profit in 4Q22, dragged by lower realised palm product prices and higher CPO production cost, but partly mitigated by FFB output recovery. We gathered that most players guided for FFB output recovery will continue into 2023, supported by further easing of labour shortage in Malaysia and output growth from Indonesia operations, while CPO production cost will likely remain sticky (at least in the near term). Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt, respectively, and Neutral stance on the sector. Fore exposure, our top picks remain KLK (BUY; TP: RM26.27) and IOI (BUY; TP: RM4.36).

A mixed bag. 4 out of 8 planters under our coverage which reported their quarterly results in Feb-23 met our expectations. While FGV and KLK beat expectation (due mainly to better-than-expected FFB output), results of Sime Darby Plantation (SDPL) and TSH, on the other hand, fell short of our expectation.

QoQ: Mixed performance. 5 out of 8 planters (namely, CBIP, FGV, Genting Plantations, KLK and SDPL) reported QoQ increase in their core net profit during 4Q22, while Hap Seng Plantations, IOI and TSH reported weaker performance. FGV and Genting Plantations were the outperformers during the quarter (with QoQ core net profit growth of 62% and 52%), due mainly to lower CPO production cost (arising from lower fertiliser application programme).

YoY: Mostly lower on higher production cost and lower prices. 6 out of 8 planters reported lower core net profit in 4Q22, dragged by lower realised palm product prices and higher CPO production cost, but partly mitigated by FFB output recovery. Notable outperformers during the quarter were FGV and KLK (which recorded YoY core net profit growth of 33% and 14%), thanks to higher FFB production, which more than mitigated higher CPO production cost and weaker downstream performance. During the quarter, 3 out of 4 integrated planters registered lower downstream contributions, dragged mainly by lower sales volume.

Output recovery from 2023. Most plantation players saw YoY increase in their FFB output (except for SDPL), as labour shortage in Malaysia eased. Most players guided for FFB output recovery will continue into 2023, supported by further easing of labour shortage in Malaysia and output growth from Indonesia operations. However, recent heavy rainfall in Peninsular Malaysia (particularly, the Southern region) could hamper FFB output of some planters (particularly, those with high exposure in Southern region, such as IOI).

Production cost guidance. While most players shared that CPO production cost has peaked, it will likely remain sticky in the near term, given the carryover of fertiliser requirement locked in at higher prices earlier and full impact of minimum wage hike.

Forecast. Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt, respectively. YTD, CPO price averaged at RM3,965/mt. In our view, CPO price will likely remain well supported at above RM4,000/mt in the near-term, supported by weak near term production outlook (arising from recent heavy rainfall, and Indonesia’s biodiesel mandate and near-term restrictive export policies).

Maintain Neutral stance on plantation sector. We maintain our Neutral stance on the sector, given the absence of notable earnings growth catalyst. For exposure, we still favour integrated players such as KLK (BUY; TP: RM26.27) and IOI (BUY; TP: RM4.36).

Source: Hong Leong Investment Bank Research - 7 Mar 2023