RHB Investment Research Reports

Plantation - Benefit From Policies May Continue in June

Publish date: Mon, 13 Jun 2022, 10:38 AM
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  • Investors should adopt a profit-taking strategy – given the continued uncertainty on Indonesia’s Domestic Market Obligation (DMO) policy impact, and with the recent change in tax structure which is punishing for companies that want to get an exemption. We downgraded three recommendations during the recent quarter’s reporting season. We maintain our NEUTRAL sector weighting.
  • The 1Q22 reporting season saw most planters booking results that beat expectations on the leveraged impact of higher CPO prices, with eight stocks above, one in line with, and five below expectations.
  • Production trends in Malaysia and Indonesia varied in 1Q22, with Malaysia’s output in 1Q22 rising 3.9% YoY, but falling 21% QoQ. For the Malaysian companies under coverage, however, we saw FFB output fall 3.5% YoY. In Indonesia, official numbers reported a CPO output rise of 9.5% YoY in 1Q22 and drop of 7% QoQ. However, we saw a mix of output trends from the companies we cover, with most posting double-digit YoY declines, while others posted flattish or double-digit growth in 1Q22, due to different weather patterns in different areas. Most planters in Malaysia are expecting production to recover further in 2H22, by a mid-to-high single-digit growth. Conversely, in Indonesia, most planters are expecting mid-single-digit growth, due to the high base effect in 2021.
  • Forward-selling activities picking up for 2H22. Despite average spot CPO prices of c.MYR6,183/tonne in 1Q22, most planters were unable to realise this, due to their exposure to Indonesia and some forward-selling activities. While we saw a less aggressive forward-selling stance in 4Q21, there has been a pick-up in forward-selling activities for the rest of 2022, as planters are nervous about the sustainability of high prices and the impact Indonesian trade policies will have on prices.
  • Malaysia’s CPO output was flattish (-0.1% YoY) in May, while stocks dropped 7.4% to 1.52m tonnes, due to a 26.7% MoM rise in exports due to the Indonesian export ban. Despite the lifting of this ban at end-May, we believe exports from Malaysia would not fall too significantly in June, given the logistics issues faced in Indonesia currently, as well as the difficulty in obtaining export permits. Stock levels could, therefore, remain low in June, and only pick up from July onwards.
  • Maintain NEUTRAL on sector, adopt a profit-taking approach. With the lifting of the Indonesia export ban, CPO prices and share prices of planters fell. As mentioned in our 20 May report (Plantation: Indonesia’s Export Ban Lifted, But What’s Next?), we advocated a profit-taking strategy, given the continued uncertainty on the DMO policy impact in Indonesia. In addition, the special USD200/tonne tax to get a DMO exemption would be punishing for players in Indonesia that are finding it difficult to obtain the necessary export permits to export their products.
  • In 1Q22, we cut our calls on Ta Ann and PP London Sumatra Indonesia to NEUTRAL (from Buy), and on Genting Plantations to SELL (from Neutral). We now have four BUYs, nine NEUTRALs, and one SELL call.

Source: RHB Research - 13 Jun 2022

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