• For Top Picks, we prefer the purer plantation plays – Ta Ann (TAH), Sarawak Oil Palms (SOP), Bumitama Agri (BAL), Golden Agri (GGR) and PP London Sumatra Indonesia (LSIP). We expect 4Q23 sector earnings to decline QoQ and YoY, as production output declines post peak season and as the downtrending CPO prices should have a higher leverage on earnings. Nevertheless, these factors should be largely reflected in the sector’s performance. We expect companies to post mostly in-line results this quarter, based on FFB output estimates. We remain NEUTRAL on the sector.

• 4Q23F earnings to fall QoQ for Malaysian and Indonesian planters... QoQ FFB output was lower, post peak season while spot CPO prices contracted slightly. In Malaysia, FFB output of the companies under our coverage dipped by an average of 0.6% QoQ, while spot CPO prices contracted by 2.6% QoQ in 4Q23. In Indonesia, we estimate that 4Q23 FFB output for stocks under our coverage fell by a much larger 11.9% QoQ (based on seasonal trends) while CPO prices – net of taxes – decreased by 2.2% QoQ. We believe the larger decline in output in Indonesia was due to the dry weather seen in Kalimantan and South Sumatra in 3Q.

• … and also YoY. YoY, we should also see lower earnings for planters in both Malaysia and Indonesia, given the higher leverage CPO prices have on earnings vs output. In Malaysia, while average FFB output rose by 4.5% YoY in 4Q23, spot CPO prices dropped 5.8% YoY. In Indonesia, FFB output is estimated to have risen 3.4% YoY in 4Q23, but net CPO prices fell 11.1% YoY.

• 4Q23F is likely to bring largely in-line earnings, based on our estimates of production levels alone (Figure 1), given the seasonally weaker output. Two may underperform forecasts based on FFB output (Kuala Lumpur Kepong, and BAL), while only one may chalk results that are stronger than projected, ie FGV Holdings. We expect eight planters to book numbers that are largely in line.

• For planters with downstream operations in Indonesia, we expect margins to weaken QoQ and YoY in 4Q23, due to a smaller tax differential between upstream and downstream products of USD35/tonne (vs USD48 in 3Q23 and USD39 in 4Q22). Conversely, Malaysian downstream counterparts may see slightly better QoQ margins due to the decrease in competition from Indonesia.

• Maintain sector NEUTRAL, with a tactically positive trading strategy, as we continue to expect a higher CPO price environment in 1H24, in anticipation of a seasonally weaker output and El Nino impact. We continue to prefer upstream players for now, with Top Picks being TAH and SOP in Malaysia, BAL and GGR in Singapore, and LSIP in Indonesia.

Source: RHB Securities Research - 7 Feb 2024