Review

The financial results of plantation companies in 1Q24 were generally mixed. Among eight companies under our coverage, four reported earnings in line with expectations, three fell below, and one exceeded our forecasts. Most of the plantation companies observed weaker YoY earnings, with exceptions such as SD Guthrie Berhad (SDG), formerly known as Sime Darby Plantation Berhad (SIMEPLT), FGV, and TSH. These companies saw increased earnings contributions from the upstream division, primarily due to higher FFB and reduced production costs. In contrast, in the downstream division, SDG was the only company that reported higher profit compared to the previous year, attributed to increased demand for Asia Pacific bulk and differentiated refineries.

For this quarter, the sector recorded a significant 32.5% YoY increase in profit, despite a notable 27.5% decline in revenue. In terms of FFB production, SDG, KLK, and KIML witnessed higher FFB production growth compared to the previous year, ranging from 3.5% to 8.5%. Conversely, the rest experienced negative FFB production growth, ranging from 1.4% to 9.8%. Additionally, on a QoQ basis, all companies recorded decrease in FFB productions, ranging from 2.0% to 29.6%.

Outlook

We expect palm oil stockpiles to increase in the 2Q due to higher productions. As foreign workers have returned to estates following Ramadan celebrations, harvesting is likely to accelerate, leading to a boost in palm oil production. A minor production peak may occur in May, potentially constraining the rise in CPO price.

The United States Department of Agriculture’s (USDA) May Oilseeds reports project global vegetable oil production for 2023/24 to reach record levels at 223.8mn tonnes (+2.5% YoY), primarily driven by high production levels of soybean oil, palm oil, and rapeseed oil. Meanwhile, according to Brazil’s national crop agency Conab, Brazilian farmers are anticipated to harvest 147.685mn tonnes (-4.5% YoY) of soybeans in the 2023/24 cycle. Additionally, the Buenos Aires Grains Exchange (BAGE) predicts Argentina's soybean production to double from last year, reaching 50.5mn tonnes. If demand does not increase, especially from major consumer countries, the pressure on global oilseeds supply may become increasingly prominent.

However, palm oil prices have been lower than competing vegetable oils (such as soybean oil and sunflower oil) recently, which may facilitate a recovery in exports. We expect the palm oil prices in coming months to be influenced by both palm oil productions in key producing countries (Malaysia and Indonesia) and weather patterns in the primary soybean-growing regions of Brazil and Argentina.

Recommendation

We upgrade the plantation sector from Underweight to Neutral as we anticipate a sustained earnings improvement in the future. Our 2024 average CPO price estimate remains unchanged at RM4,000/tonne. Maintain Buy on KIML (TP: RM2.50) and Wilmar (TP: SGD4.04). Additionally, we have upgraded IOICORP (TP: RM4.39), SDG (TP: RM4.78) and TSH (TP: RM1.37) to BUY, while KLK (TP: RM23.83) and UMCCA (TP: RM: 5.38) have been upgraded to HOLD. Lastly, we have downgraded FGV (TP: RM1.34) to SELL from hold.

Source: TA Research - 5 Jun 2024