• Overall, the 2Q21 earnings released by companies under our coverage was impressive with eight companies coming in above our expectations.
• We believe plantation stocks currently deserve better attention as higher earnings and palm products prices have resulted in several stocks carrying attractive valuations.
• We foresee attractive plantations’ segment margins seen recently to sustain in the upcoming 3Q21, given higher ASP of palm products and more realistic production expectations.
• Maintain OVERWEIGHT given earnings growth estimated to remain firmly on the upside as CPO price is anticipated to stay above RM4,000/MT in the short-term before moderating in the later part of 4Q2021. We have revised average CPO price forecast to RM3,700/MT (RM3,100/MT previously) for 2021 and RM2,950/MT (RM2,700/MT previously) for 2022.

Performance was impressive

The recently concluded corporate earnings season was remarkable for plantation companies, based on our analysis. Out of ten stocks under our coverage, eight companies reported earnings that were above expectations, with two coming in within our expectation. Earnings were generally higher yoy as improvement in ASP of palm products realised negated the increase in production costs and operational costs as well as lower FFB and CPO production. Expansion in margins and profit contribution from downstream manufacturing segment, aided to the better results for KLK and SIME Plant. Conversely, the improvement in qoq results was generally due to better palm product price realised as well as higher growth in FFB and CPO production during the period. The FFB production growth for GENP and TSH turned out to be positive yoy (Table 3) mainly driven by higher crop from Indonesian estates as more areas came into maturity, whilst existing mature areas moved into higher yielding age brackets. Malaysian estates are still lagging as productivity is wedged by the lag impact of weaker yield from the dry weather experienced in 2019 and lower fertiliser application as well as hiccup in productivity due to labour shortage issues.

Tight palm oil supply in Malaysia set to keep CPO price supported

Apart from lower yield, palm oil production is expected to grow at a slower pace as harvesting and manuring activities is believed to be interrupted by an acute shortage of labour especially in Peninsular Malaysia and Sarawak. The hiring and renewing of workers’ permits are being frozen on global fight against prolonged Covid-19 pandemic as borders are closed and inter-state traveling are banned. Besides reopening of major economies, which would take place sooner rather than later, we also believe that tight supply of edible oils and stockpiles compounded by improving demand scenario and rally in soybean oil (SBO) prices, rapeseed oil prices and sunflower oil prices would keep CPO price supported. The palm oil price competitiveness which has large volume and stable supply throughout the year, in our view, has its own benefits, as we believe it has the ability to offset the impact of increasing food commodity prices i.e., to cushion the trade-off issue between the use of agricultural commodities for food and energy.

Earnings growth outlook firmly entrenched on the upside

We expect plantation’s earnings for this year would be more visible given average CPO price achieved up to August 2021 averaging at RM4,123.94/MT vs. RM2,528.56/MT for the same period last year. Fundamentally, the tight inventory level and supply of palm oil would add an upward pressure to palm oil price and, thus, would continue to support the price in the short-to-medium term, in our view, before moderating in the later part of fourth quarter 2021. The higher realized price in 2021/22 against 2020 should see plantation segment fetching better margins in FY21 and FY22. Nonetheless, we remain cautiousthat earnings could be affected by upward pressure on production and operational costs. There is also a possibility of lower-than-expected production and sales volume as supply/demand is affected by a prolonged pandemic together labour issue remains as a perpetual concern to planters, while margin contraction may well continue for downstream players as demand and price (feedstock and selling price) concerns heighten. However, we estimate that higher revenue and better margins expected from oleochemical division, would partially cushion earnings volatility in the downstream segment.

OVERWEIGHT the sector

We predict that the average CPO price this year would break the 2011’s record CPO average price of RM3,278/MT - judging from the CPO price trend, currently trading at much higher than recent historical prices. We have raised our 2021 average CPO price forecast to RM3,700/MT from RM3,100/MT previously, and to RM2,950/MT from MYR2,700/MT initially forecast for 2022. Off note, these changes already reflected in our earnings forecasts in the recent results released in August 2021 - refer Table 2. Our base case scenario is for CPO prices to continue their upward trajectory in the shortterm – due to tighter supplies and improved demand as discussed earlier – and then moderate in the later part of 4Q21. In view of this, we expect plantation companies’ earnings to remain firmly on an uptrend for the upcoming results release.

Maintain OVERWEIGHT on the sector as most stocks under coverage are currently carrying attractive valuations. We have BUY call on HAPL (RM2.17), SOP (RM4.50), TSH (TP: RM1.23), IOI (RM4.80), KLK (RM24.40), SIME Darby Plants (TP: RM5.00) and GENP (TP: RM9.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), and FGV (TP: RM1.30); and non-rated for TH Plant.

Variances in earnings forecast would be due to lower-than-expected production, lower-than-expected ASP realised of palm products and higher-than-expected costs. Risk factors include 1) slower-than-expected economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) prolonged Covid-19 pandemic with another round of movement restriction worldwide.

Source: BIMB Securities Research - 6 Sept 2021