RHB Investment Research Reports

Plantation - 2Q24 Earnings in Line, Expecting a Better 2H24

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Publish date: Wed, 11 Sep 2024, 09:28 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

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  • Top Picks remain a mix of pure and integrated planters – SD Guthrie (SDG), IOI Corp (IOI), Johor Plantations (JPG), Sarawak Oil Palms (SOP) and London Sumatra Indonesia (LSIP). PO inventory improved to 1.88m tonnes in August from higher production and lower exports. We expect PO inventory to continuously increase on demand weakness in the coming months, potentially crossing the 2m tonne mark around October-November. Main catalyst remains La Nina, although its probability has reduced to 74% in 4Q24 (82% last month). Stay NEUTRAL.
  • The 2Q24 reporting season saw earnings that were mostly in line. Nine planters met expectations, with two above and three coming in below. The upside surprises came from SOP and LSIP due to lower unit costs and higher external purchases, while the downside surprises were from Ta Ann (due to disappointment from the timber division), Golden Agri (GGR) (weaker FFB output) and Wilmar International (weaker JV and associate earnings). We keep our 2024-2025 CPO price assumptions at MYR3,900 and MYR3,800/tonne.
  • In Malaysia, total output spiked 19% QoQ and 16% YoY in 2Q24, bringing 1H24 output up 9.8% YoY. FFB output of companies under our coverage also rose 9.8% QoQ and 6.4% YoY in 2Q24. Most planters expect stronger output growth in 2H24 as output has entered the peak production stage, with expectations of FFB growth in the mid- to high-single digits.
  • In Indonesia, we saw an average 9% QoQ growth but 1.4% YoY output declined in 2Q24 for the companies we cover, bringing 1H24 output down 5.2% YoY. This time around, figures from the Association of Indonesian Palm Oil Producers (GAPKI) showed a similar trend, with YTD-May CPO output showing a 3.2% decline YoY. Indonesian players are expecting production to pick up more strongly in the coming months and continue to expect to see flattish- to moderate-output growth of 0-5% in 2024.
  • We saw mostly higher QoQ margin trends for players with downstream operations, with all, but one (Kuala Lumpur Kepong), which posted weaker 2Q24 margin due to the global oversupply of oleochemicals, which led to margin compression. All other planters with downstream operations – SDG, FGV Holdings, IOI, First Resources and GGR saw stronger QoQ and HoH margins in 2Q/1H24. Going forward, downstream players continue to guide for better margins in 2H24, as importing countries have run down their inventory levels, while there could be some pre-stocking activities before the new EU Deforestation Regulation (EUDR) implementation on 30 Dec 2024.
  • Inventory levels rose to 1.88m tonnes in August, (July: 1.75m tonnes), driven by better production (+3% YoY) and lower exports (-10% MoM). Stock levels should continue improving, and potentially crossing the 2m-tonne mark around October-November (from our earlier November-December estimate), discounting unforeseen weather circumstances, ie La Nina.
  • NEUTRAL. We continue to like IOI, SOP, JPG and LSIP on valuation grounds. We upgraded SDG to BUY during the quarter on its diversification strategies.

Source: RHB Securities Research - 11 Sept 2024

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