BPLANT’s 9MFY22 missed expectations as it fell into losses in 3QFY22. Its FFB production rose seasonally by 16% QoQ but rising fertiliser costs and falling prices resulted in the group falling into the red. We cut our FY22/FY23 earnings forecasts by 33%/25%, reduce our TP by 32% to RM0.65 (from RM0.95) and downgrade our call to MARKET PERFORM from OUTPERFORM.

Below expectations. 9MFY22 core net profit came in below expectations, accounting for 56% our full-year forecast and 60% of the full-year consensus estimates. The variance against our forecast came largely from lower CPO prices realised but offset by higher production cost in 3QFY22, leading to losses. The declared dividend of 1.1 sen brings the total YTD to 11.2, below our expectation of 14.0 sen.

YoY, revenue grew 28.9% as CPO prices remained elevated above FY21 levels. The group recorded an average CPO price of RM5,527/MT for 9MFY22, up 36% compared to 9MFY21. However, FFB production fell 8% YoY as the group continued to feel the effects of a persistent labour shortage as well as its aging palm profile. Gross profit also fell 3.5% following the acute rise in costs due to heightened fertiliser prices, the increased minimum wage and the lower production. Nevertheless, core earnings (excluding a RM367.7m pre-tax gain on land disposal during 1HFY22) grew 13% as the group continued to benefit from the elevated CPO prices, higher interest income and lower finance costs.

QoQ, their seasonal FFB production grew 16%, broadly in line with the 13% seasonal increase during 3QFY21. Group CPO prices came off significantly during 3QFY22, falling 35% to RM4,089/MT from the average of RM6,327/MT during 2QFY22. Revenue fell in line with CPO prices, decreasing 31.2% QoQ. However, gross profits fell 78% as elevated fertiliser prices and falling yields resulted in the group struggling to cover costs. Overall, the group fell in to the red, recording a net loss of RM4.8m.

Looking forward. The immediate outlook for the group looks cloudy given persistent cost pressures and challenges regarding FFB yield. While the group continues to push for improvements in its FFB production and age profile via its Plantation Performance Improvement Programme, immediate results may be marginal given the limited extent that such initiatives can fully address labour shortfalls and the aging palm profile. The group has already seen the impact from elevated fertiliser prices and falling yields on performance during 3QFY22 which could persist in the near to medium term.

Regarding the global edible oil market, CPO prices have come off significantly since the peak during 2QCY22, settling around the RM3,500/MT-RM4,000/MT range as supply recovers. However, prices are still above pre-CY22 levels and should stay firm on supportive post Covid economic reopening. We expect demand recovery to continue as record high palm oil prices limited buying in 1HFY22 and, despite some relaxations, China has yet to fully revert to a new post Covid normal. Elevated fossil fuel prices are also prompting stronger demand for biofuels. Lastly, slower demand due to recession cannot be dismissed but edible oil demand has historically been resilient. As such, after accounting for recent price trends, we continue to expect CPO prices to remain elevated during FY23 but at a lower level of around RM3,800/MT compared to RM4,000/MT previously.

Post results, we adjust FY22F/FY23F earnings downwards by 33%/25% as we account for the lower FFB production and significantly higher costs during 2HFY22. Additionally, we lower our FY23 CPO price assumption by 5% to RM3,800/MT. We also lower our FY22F/FY23F dividend to 12.5/6.0 sen.

Downgrade to MARKET PERFORM with a lower TP of RM0.65. We continue to like BPLANT for its: (i) position as a pure upstream producer as a proxy to elevated CPO prices, and (ii) cash-rich position and good dividend payout record. However, we remain cautious given cost pressures and falling yields that have begun to drag performance as commodities prices are coming off.

Overall, we downgrade BPLANT to MARKET PERFORM with a lower TP of RM0.65 based on FY23F PER of 12x. While we maintain a 20% discount to the prospective PER we ascribe to its larger, more integrated peers, we shift our sector target valuation to 15x as we roll our valuation basis forward. We make no adjustments to TP based on a 3-star ESG rating as appraised by us.

Risks to our call include: (i) lower-than-expected CPO prices, (ii) higher-than-expected rise in costs, and (iii) lower-thanexpected FFB production.

Source: Kenanga Research - 23 Nov 2022