Disappointing 2Q17 Performance

2Q17 plantation sector revenue was stronger yoy driven by higher FFB and CPO production as well as stronger CPO prices. However, core net earnings for the plantation sector were weaker yoy, mainly due to higher cost of production. Results for KLK, FGV, IJMP, IOI Corp, GENP, Jaya Tiasa and WTK were below our expectations; HAPL and Ta Ann were within, while SIME came in above expectations. We recently lowered our 2017-18E sector earnings by 4-8% after taking into account the 2Q17 results. We also downgraded our ratings on KLK, IOI Corp, IJMP, Jaya Tiasa and WTK. We maintain our NEUTRAL sector rating with GENP as our top pick.

Recent Changes to Our Forecasts

For 2Q17, results for KLK, FGV, IJMP, IOI Corp, GENP, Jaya Tiasa and WTK were below our expectations; HAPL and Ta Ann were within expectations, while SIME came in above our expectations. We had made changes to our forecasts for KLK, FGV, IJMP, IOI Corp, GENP, Jaya Tiasa, WTK and SIME after factoring in the 2Q17 results. Also, despite Ta Ann’s 2Q17 earnings within our expectations, we had cut our 2017-19 EPS forecasts by 5-25% to take into account the recent cut in export log quota, lower log production assumption and higher cost of production assumptions for the log and plywood divisions. As such, we downgraded our ratings for KLK, IOI Corp, IJMP, Jaya Tiasa and WTK.

Stronger Revenue Driven by Higher Yoy Production and CPO Prices

Plantation sector revenue in 2Q17 increased by 13% yoy, underpinned by higher FFB production coupled with higher ASPs for CPO and PK. Meanwhile, on a qoq basis, plantation companies posted a decline in revenue (except IOI Corp and GENP) because of lower CPO and PK ASPs but partially offset by higher FFB and CPO production.

Higher Yoy FFB and CPO Production as Well as CPO ASPs

Own-FFB production and CPO production in 2Q17 for plantation companies under our coverage were higher yoy and qoq. The recovery in production was largely expected given the previous El Nino phenomenon badly affected production back in 2015-16. CPO ASPs for the plantation companies under our coverage in 2Q17 rose by 8.8% yoy but declined by 10% qoq to RM2,770/MT.

Maintain NEUTRAL Sector Rating; GENP Remains Our Top Pick

Across our coverage universe post the 2Q17 results, we have BUY ratings on Genting Plantation and Ta Ann. We have HOLD ratings for KL Kepong, Felda Global, Sime Darby, IJM Plantation, Hap Seng Plantation and Jaya Tiasa; while IOI Corp and WTK carry SELL ratings. For plantation-sector exposure, GENP is our top sector pick.

Source: Affin Hwang Research - 11 Sept 2017