RHB Investment Research Reports

Plantation - Diverse Earnings Trends in 4Q22; Still NEUTRAL

Publish date: Tue, 31 Jan 2023, 10:33 AM
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  • Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp (IOI) and Wilmar International (Wilmar). We expect to see mostly in-line earnings this coming quarter, with two players that could book better-than-estimated results, and one that could come in below projections. Also, earnings trends between the Malaysian and Indonesian planters could vary in 4Q22, due to the change in tax structure in Indonesia in mid-Nov 2022. Maintain NEUTRAL on sector.
  • 4Q22 earnings to drop QoQ for Malaysian planters, and be flattish for Indonesian players. In Malaysia, FFB output for the companies under our coverage fell by an average of 0.5% QoQ in 4Q22, while spot CPO prices decreased by 1% QoQ – which would translate to slightly lower QoQ earnings. In Indonesia, we estimate 4Q FFB output also fell by c.14% QoQ, based on the trend in 3Q. However, CPO prices net of taxes rose 11.6% QoQ (due to the impact of the levy-free period until mid-Nov 2022), which could translate to flattish QoQ earnings.
  • On a YoY basis, the earnings trend may also be different for Malaysian and Indonesian planters. For the Malaysian planters, although average FFB output rose 5% YoY in 4Q22, spot CPO prices dropped 24% YoY. In Indonesia, we estimate FFB output rose c.11.6% YoY in 4Q22, while net CPO prices were relatively flat YoY (-1.6%) due to the change in tax structure. As such, we may see Malaysian planters post weaker YoY earnings while Indonesian planters post stronger YoY earnings in 4Q22.
  • As CPO price has a greater effect on earnings than output growth, each company’s forward selling policies would also affect its earnings outlook. As such, planters like KLK, IOI, Sime Darby Plantation and FGV Holdings (Figure 4) that undertook more aggressive forward selling activities should be able to recognise better CPO prices than their peers in 4Q22. Spot CPO prices in 4Q22 were flattish QoQ at MYR3,931/tonne, but fell 24% YoY. For 2022, spot CPO prices averaged MYR5,136/tonne (+16% YoY). For 1Q23, given the 26% YoY decline in spot CPO prices so far, planters may likely see another YoY drop in quarterly earnings.
  • 4Q22 likely to bring mostly in-line earnings for most players, based on our estimates of production output alone (Figure 1). Two may outperform forecasts based on FFB output (KLK and FGV), while one could post disappointing numbers due to weak FFB output (ie IOI). Nevertheless, as it is only the 1HFY23 for IOI, there could be a turnaround in output trends in the later quarters.
  • For those with downstream operations in Indonesia, we expect margins to improve QoQ in 4Q22 as the tax levy holiday ended in mid-November. As such, the tax differential between upstream and downstream products should widen, resulting in better downstream margins. However, Malaysian downstream counterparts should see narrower QoQ margins with the reinstatement of the levy, as stiff competition resumes from Indonesia.
  • Maintain NEUTRAL, with a trading strategy. We still like the integrated players like KLK, IOI and Wilmar, but also see value in counters like Sarawak Oil Palms, Bumitama Agri and Golden Agri.

Source: RHB Securities Research - 31 Jan 2023

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