Maintain NEUTRAL with an unchanged 2018 CPO price estimate of RM2,400/metric ton (MT). 1Q18 CPO prices averaged RM2,469/MT, close to our RM2,500/MT forecast for the quarter. With inventory to continue building up, we expect 2Q18 CPO prices to average RM2,400/MT. Given a weaker price outlook, large-cap integrated planters have and should continue to perform well thanks to their better earnings stability, but mid- and small-cap upstream producers are likely to track CPO price performance. Expect demand and possible price volatility as countries impose protectionist trade policies. However, we think the short-term downside is minimal as CPO prices trade at a near-zero premium to gasoil prices after the recent crude oil rally. Weather risk is also minimal, locally, but Argentinan drought could support soy and thus palm oil prices. Nevertheless, we expect planters to show flat 1Q18 performance against 1Q17 (better production, weaker prices), and weaker performance against 4Q17 (lower production and prices). Our Top Pick is PPB (OP; TP: RM22.60) with its strong Consumer exposure accounting for its Wilmar stake, and unjustifiably low PBV (1.0x) vs. Wilmar (1.3x). We also upgrade FGV (TP: RM2.00), TAANN (TP: RM3.70) and SAB (TP: RM 4.40) to OP while downgrading GENP (MP; TP: RM10.75) to MP. Other calls and TP are unchanged, namely: SIMEPLT (MP; TP: 5.90), IOICORP (MP; TP: 5.15), KLK (MP; TP: 25.75), PPB (OP; RM22.60), HSPLANT (MP; TP: RM2.30), CBIP (OP; TP: RM1.80), TSH (MP; TP:RM1.60), UMCCA (MP; TP: RM6.20), and IJMPLNT (UP; TP: RM2.00).

The weakest quarter. 4QCY17 plantation results recorded the weakest showing for the year, with only HSPLANT and PPB above consensus expectations but seven counters missed expectations and four (GENP, IOICORP, KLK and SIMEPLT) came within. This was weaker than the already lacklustre 3QCY17 which saw 3 above, 3 within and 7 below expectations. Although both quarterly CPO prices and FFB production improved YoY by 4% and 5%, respectively, earnings rose at a slower-than-expected pace, leading to higher earnings misses. Planters with high Sabah exposure (IJMPLNT, IOICORP, UMCCA) suffered earnings decline as weak yields drove up unit costs, although in the case of TSH and GENP, their higher prime mature landbank in Indonesia saw strong production surge which helped offset Sabah weakness.

1Q18 CPO price within expectations. CPO prices peaked in on 1 Mar, at RM2,559/MT, before dropping sharply to RM2,376/MT on 12 Mar as stronger production was confirmed. For the quarter, prices averaged RM2,469/MT, close to our estimated RM2,500/MT average for the quarter. Looking ahead, we think continued production pickup should lead to rising inventories, which should lead to lower CPO prices quarter-on-quarter (QoQ) of RM2,400/MT for 2Q18. We maintain our view that CPO prices should bottom in 3Q18 before picking up by year-end.

Source: Kenanga Research - 5 Apr 2018