The Malaysian planters recorded less than stellar results for 1Q15 due to the extreme weather which impacted FFB production, combined with the prevailing low CPO prices. Only two out of 11 companies reported in-line results, while the rest disappointed. We expect a better showingin 2Q15, as FFB production has improved by double-digit MoM for most companies. We remain NEUTRAL on the sector.

• Mostly disappointing. The 1Q15 reporting season saw all but two companies recording disappointing results. Of the 11 companies we cover, two reported earnings that were in line with our expectations, while the remaining nine booked net profits below expectations.
• Weather issues abound. The recurring theme again this quarter amongst the plantation companies was lower-than-expected FFB production, as productivity was affected by the delayed impact of the dry weather in 1Q14 in Sabah, the wet monsoon season in 1Q15 in Peninsular Malaysia and Sarawak and the dry weather in Sabah in 1Q15. The companies with plantations in Kalimantan like Genting Plantations and Sime Darby were also affected by the wet weather in 1Q15. Going forward, despite the slightly softer CPO prices seen so far, we expect the 2Q15 to yield better results overall, due to improvements expected in FFB yields as weather has normalised in most areas of Malaysia and Kalimantan since April – although Sabah still looks to be dry. Most companies recorded double-digit MoM FFB production growth in April, bringing down the average rate of decline in production growth YTD (to April). We understand that May would be a strong month for FFB production, with most companies continuing to record double-digit MoM FFB growth. In 2H15, however, we should start looking out for signs of the impact of the dry weather experienced in parts of Indonesia in 2H14, as the 12-month impact of dry weather is usually the worst.
• Maintain NEUTRAL. All in, during this reporting season, we downgraded one stock, ie Feda Global Ventures (FGV) to SELL from Neutral, while all other recommendations were unchanged. IJM Plantations remains our Top Pick for the Malaysian plantation space, due to its strong FFB production growth which could help offset somewhat the effects of the current sober CPO price environment.

1Q15 results denote a washout quarter The 1Q15 reporting season saw all but two companies recording disappointing results. Of the 11 companies we cover, two reported earnings that were in line with our expectations, while the remaining nine reported net profits below expectations. The two that reported results that were in line included IJM Plantations (IJMP MK, BUY, TP: MYR3.90) and CB Industrial Product (CBP MK, NEUTRAL, TP: MYR2.20). The nine that reported weaker-than-expected earnings include IOI Corporation (IOIC MK, NEUTRAL, TP: MYR4.40), TDM (TDM MK, NEUTRAL, TP: MYR0.63), TSH Resources (TSH MK, BUY, TP: MYR2.57), Felda Global Ventures (FGV) (FGV MK, SELL, TP: MYR1.70), Kuala Lumpur Kepong (KL Kepong) (KLK MK, NEUTRAL, TP: MYR22.00), Sime Darby (SIME MK, NEUTRAL, TP: MYR8.75), TH Plantations (THP MK, SELL, TP: MYR1.00), Sarawak Oil Palms (SOP MK, BUY, TP: MYR7.07), and Genting Plantations (GENP MK, BUY, TP: MYR11.50).

The recurring theme again this quarter amongst the plantation companies was lowerthan-expected FFB production, as productivity was affected by the delayed impact of the dry weather experienced in 1Q14 in Sabah, the wet monsoon season in 1Q15 in Peninsular Malaysia and Sarawak and the dry weather in Sabah in 1Q15. The companies with plantations in Kalimantan like Genting Plantations and Sime Darby were also affected by the wet weather in 1Q15.

We highlight that different weather patterns were experienced by the different areas during the 1Q15. It Sabah, it was extremely dry during the months of February to May 2015, with some parts registering rainfall of less than the minimum requirement of 100mm a month. This caused stress on the palm oil trees, resulting in multiple unopened spears (see Figure 1). This was the opposite of the case in Sarawak, Peninsular Malaysia and parts of Indonesia like Kalimantan during the same period(see Figures 2 and 3), where the monsoon season was extra wet, bringing floods to certain areas of Sarawak and the south and east coasts of Malaysia. The extra wet weather in Sarawak also affected the timber companies with plantation exposure, namely, Jaya Tiasa (JT MK, NEUTRAL, TP: MYR1.40) and Ta Ann (TAH MK, BUY, TP: MYR4.70), given that al of their plantation estates are based in Sarawak.

Overall, we revised our earnings forecasts and TPs downwards for eight out of the eleven plantation companies we cover, while only one of the two timber companies we cover had forecast and TP revisions (see Figure 4). We highlight that two of the eleven plantation players we cover, namely FGV and TDM, reversed into the red during the quarter – due to the combined effect of lower CPO prices and weak FFB production.

Going forward, despite the slightly lower CPO prices seen so far (-4.5% QTD), we expect 2Q15 to yield better results overall, due to improvements expected in FFB yields, as the weather has normalised in most areas of Peninsular Malaysia, Sarawak and Kalimantan since April – although Sabah still looks to be dry. The double-digit QoQ improvement in FFB production should more than offset the slightly weakeraverage CPO price.

As Figure 5 shows, most companies recorded a double-digit MoM rate of FFB production growth in April, bringing down the average rate of decline in production growth for the YTD-April period. We understand that May continued to be a strong month for FFB production, with most companies continuing to record double-digit MoM FFB growth. In 2H15, however, we should start looking out for signs of impact of the dry weather experienced in parts of Indonesia in 2H14, given that the 12-month impact of dry weather is usually the worst.

Risks Major risks for the sector are: i) a reversal in crude oil price trends, resulting in a reversal of CPO and other vegetable oil prices; ii) weather abnormalities resulting in an oversupply or undersupply of vegetable oils; iii) slower-than-expected implementation of biodiesel mandates; and iv) a slower -than-expected global economic recovery, resulting in lower-than-expected demand for vegetable oils.Forecasts and recommendations

Still NEUTRAL. We maintain our CPO price assumptions of MYR2,350/tonne for 2015 and MYR2,500/tonne for 2016. All in, during this reporting season, we downgraded one stock to SELL (from Neutral), ie FGV, while all other recommendations were unchanged. IJM Plantations remains our Top Pick for the Malaysian plantation space, due to its strong FFB production growth which will help offset somewhat the effects of the current sober CPO price environment. Overall, we maintain our NEUTRAL rating on the plantation sector.

Source: RHB Research - 5 Jun 2015