1Q17 plantation revenue was stronger as all the plantation companies in our universe saw higher FFB production due to a recovery from the severe El Nino effect in 2015/16, along with higher CPO and PK ASPs. KLK, FGV, HAPL and GENP results were inline with our expectations, while those from IOI Corp, SIME and IJMP came in below. As such, we had cut our earnings forecasts at IOI Corp, SIME and IJMP by 11-24% after the 1Q17 results. With our recent upgrade of GENP to BUY, the counter joins KLK on our top-picks list, as we expect higher FFB and CPO production to spur its earnings growth. We also downgraded IOI Corp to HOLD on valuation. We maintain our NEUTRAL sector rating.

1Q17 Plantation Revenue Increased by 26% Yoy

Plantation sector revenue increased by 25.7% yoy as all plantation companies under our coverage posted higher revenues on the back of higher FFB production as well as stronger CPO and PK ASPs. However, plantation sector earnings fell by 5% yoy, mainly dragged down by IOI Corp, which had lower one-off gains.

Higher FFB Production and CPO ASPs Yoy

In 1Q17, own-FFB production increased by an average of 17% yoy as the El Nino effect on production in 2015/16 subsided. However, on a qoq basis, FFB production declined by 14% qoq mainly due to a seasonally lower production period. Meanwhile, 1Q17 CPO ASPs rose by an average of 10% qoq and 37% yoy partly due to tight supply of world edible oil, higher soybean oil premium and the weak RM against the USD.

Recent Changes to Our Forecasts

The 1Q17 results for KLK, FGV, HAPL and GENP were within our expectations, while those for IOI Corp, SIME and IJMP came in below our expectations. Thus, we recently cut our FY17-19E earnings for IOI Corp, SIME and IJMP by 11-24% after their weaker-than-expected results.

Maintain NEUTRAL Sector Rating; Top Pick Remains KLK, Adding GENP

We maintain our NEUTRAL sector call. We reaffirm KL Kepong (KLK MK, RM24.86, BUY), as a top sector pick for its solid management and expect higher FFB and CPO production, as well as lower production cost to drive its earnings growth over 2017-19E. KLK is also a country top pick. Genting Plantation (GENP MK, RM11.20), a recent upgrade to BUY, is added to our top picks, while IOI Corp (IOI MK, RM4.55) was downgraded to HOLD.

Key Risks

Key downside risks to our NEUTRAL sector rating include weaker demand for vegetable oils, which would lower ASPs, and unfavorable changes in policies and taxes. The key upside risks would be a strong rebound in the global economy as well as demand for and prices of vegetable oils.

Source: Affin Hwang Research - 7 Jun 2017