3QCY12 results below the consensus expectations. Out of the nine planters under our coverage, five of them miss their consensus earnings estimates in 3QCY12 with the remaining in line with none performing above expectations. Companies such as IOICORP, FGVH, GENP, IJMP and TSH earnings were below expectation due to the lower than expected selling prices for CPO while others suffered from a longer than expected tree stress.

Watch out for 4QCY12 earnings cliff. Earnings are poised to tumble at least 30% YoY and 20% QoQ. The significantly lower YoY earnings should be driven by expected lower average spot CPO prices of ~25% to ~RM2250/mt in 4QCY12 (from RM3014/mt in 4QCY11). QoQ, we think earnings could decline more than 20% as CPO price is expected to tumble by ~21% to ~RM2250/mt in 4QCY12 (from RM2851/mt in 3QCY12). As CPO prices have plunged to below RM2,500/mt in early Oct-12 and stay at that low level for an extended period, planters 4QCY12 earnings will likely to fall by at least the same magnitude as CPO prices tend to command very significant impact to planters earnings historically. As we think consensus have yet to reflect this in the earnings forecast, another round of deeper earnings cut is likely.

Nov-12 CPO inventory could stay near record high level at 2.49m mt. Despite a slight decline of 1% MoM for inventory, it remains significantly higher by 20% YoY. On the demand side, we have assumed CPO exports to increase by 5% MoM to 1.85m mt in Nov-12 as China trader is expected to stock up refined palm oil ahead of tighter regulations on edible oil imports from 2013 onwards. On the supply side, we have assumed 6% MoM decline of CPO production to 1.82m mt which is in line with historical seasonal FFB volume decline MoM in Nov. Tentatively, our forecast shows that inventory should remain close to its historical high level of 2.51m mt and keep CPO prices upside limited below RM2500 in the near term. Note that MPOB is expected to release its inventory data on 10-Nov-2012 (~1 week from now).

2012-2013 CPO price assumptions cut by 3%-5% to RM2,900-RM2,850.  Our previous assumption was RM2,975 for 2012 and RM3,000 for 2013. In our CPO price forecast model using the multi-regression method, we have now assumed higher ending inventory of 2.48m-2.38m mt (from 2.28m-2.05m mt) for 2012-2013  with all other variables remained unchanged. As a result, we slash our FY12-14 earnings forecast for all planters under our coverage by up to 14% after incorporating our new CPO price forecasts.

Downgrade to UNDERWEIGHT. We believe that the threat of earnings falling 'off the cliff' during the next earnings season result in Feb-13 is very real. As earnings are poised to fall at least 20% in 4QCY12 both YoY and QoQ, there is still room for plantation stocks' share prices to drop further. In addition, the stubbornly high inventory at more than 2.0m mt may continue throughout 1Q13 and keep the CPO price upside limited below RM3000/mt.

56% of planters' earnings miss consensus estimate. Out of the 9 planters under our coverage, only 4 manage to meet consensus estimates in 3QCY12 reported earnings. None of these planters beat consensus estimate and there are as many as 5 companies (IOICORP, FGVH, GENP, IJMP and TSH) earnings which trail consensus estimate in 3QCY12. We believe that this is caused by lower than expected selling prices for CPO and weaker than expected FFB production volume. For FGVH and IOICORP, we believe the impact of tree stress has been greater due to its maturing estate with estimated average age profile of 16.5 and 13.7 years old respectively. For IJMP and TSH, we believe its FFB yield has been caused by lower FFB production from Sabah which were hardest hit by tree stress due to prolonged dry period about 2 years ago.

Only PPB registered higher earnings YoY in 3QCY12. PPB's 3Q12 core net profit improved 9% to RM249m in line with goof set of result from Wilmar which has benefited from turnaround to profitability in its soybean crushing division in China. Other planters register lower earnings YoY with SIME register the lowest losses thanks to better contributions from non-plantation divisions. Meanwhile, TSH earnings decline the most as it was affected by lower FFB production of 7% YoY, lower CPO prices of RM2,851/mt (-8% YoY based on MPOB prices) while cost of production may have increased at least 15% due to its young age profile in Kalimantan.

Source: Kenanga