• Overall, out of the 10 companies under our coverage, 7 met expectations, while 3 companies (Hap Seng, FGV, and SOP) exceeded our earnings forecasts. The higher reported earnings growth in 2QCY24, was attributed to an increase in palm oil output and the higher realised average selling prices (ASP) of CPO.

• Moving forward, we anticipate the average CPO prices will moderate in 2H2024 due to higher CPO production, ample supply of soybean, unattractive CPO due to a narrower discount gap to soybean and the strengthening of ringgit may impact CPO export competitiveness. However, upside risk include stronger-thanexpected demand and escalating geopolitical and trade tensions.

• We maintain our 2024 CPO average selling price assumption of RM3,800/MT, with an estimated trading range of approximately RM400/MT above or below RM3,800/MT for the remainder of the year.

• We reiterate a NEUTRAL call on the sector due to the absence of new notable catalysts. We favour IOI (BUY; TP: RM4.50) for its higher FFB output, lower costs, and improved downstream earnings from the oleochemical and specialty fats subsegments.

2QCY24 Earnings Mostly in Line with Expectations

The 10 plantation companies under our coverage reported earnings that were largely inline with expectations, except for 3 companies; FGV, Hap Seng, and SOP that surpassed our forecasts. The variance primarily stemmed from lower-than-expected operating costs, particularly in manuring (lower fertilizer prices). The FBM KL Plantation Index (KLPLN Index) increased by 6% YoY (as of 30 Aug 2024), driven by trading opportunities arising from the overall better 2Q2CY4 performance, supported by higher production and realized CPO prices. The improvement in the KLPLN Index was primarily led by gains in pure planter stock prices, with THP (+13% YoY) and TSH (+12% YoY). However, the KLPLN Index still underperformed the FBMKLCI Index by 9% YoY, likely due to a lack of positive new catalysts for the plantation sector.

Higher 2QCY24 PBT Growth Across the Board

All planters under our coverage reported positive 2QCY24 PBT growth for both QoQ and YoY basis, thanks to higher palm oil output and improved CPO realized average selling prices (ASP). Total 2QCY24 output under our universe saw an increase in FFB production to 6.5mn tonnes (+9% QoQ, +9% YoY) and CPO production to 2.1mn tonnes (+19% QoQ, +17% YoY). This growth was mainly due to an increase in harvesters from the normalizing availability of foreign labour, improved yields, and higher oil extraction rates (OER). Additionally, better productivity, coupled with reduced production costs due to lower fertilizer prices, led to strong earnings performance and better margins for the upstream segment across most companies, offsetting lower contributions from property and other segments. The average CPO realized ASP under our universe also improved, led by Hap Seng, IOI, and SOP, which outperformed the MPOB average CPO price of RM4,038/MT (refer table 2). This improvement was mainly attributed to the weaker ringgit and strong demand from India and China, driven by restocking activities. Additionally, CPO price discount to soybean oil widened, staying mostly above USD100/MT throughout 1H24, providing support to CPO prices.

In the downstream manufacturing segment, we observed QoQ margin improvements, with the exception of KLK, which reported weaker margins due to losses in its refineries and kernel crushing operations. Looking ahead, we remain cautious about the downstream refineries segment due to market oversupply and competition from Indonesia, but we expect to see a recovery in the oleochemical sub-segment. IOI anticipates near-term demand improvement for oleochemicals as buyers, particularly from Europe, begin restocking in preparation for the implementation of the EU Deforestation Regulation (EUDR).

CPO Price Volatility Expected in the Near Term

Moving forward, barring any major unexpected events, we anticipate a moderation in CPO prices in 2H2024 compared to 1H2024's average level of RM4,000/MT. This is driven by a seasonal uptick in FFB output coupled with ample soybean supply. The US soybean and European rapeseed oil harvesting season in 3Q will further add to the global supply of edible oils in 3Q and 4Q. Currently, CPO is trading at a narrower discount to soybean oil (as of the time of writing: USD10/MT; 5-year average discount: USD229/MT), making it less attractive to importers. Additionally, the strengthening of the ringgit against the US dollar may also

impact export competitiveness, further weighing on demand for palm oil products. However, there are several upside risks to our CPO price outlook in 2H2024, which is likely to be influenced by several factors:

1. Higher than expected demand. Increased palm oil demand from major importing countries, driven by rising consumer goods consumption, particularly in personal care and cooking products, in India, as well as stronger demand during festive seasons (e.g., Deepavali and Mooncake Festival).

2. Prolonged geopolitical tension and trade wars. The ongoing crises in the Black Sea and Red Sea have led to higher import costs for other edible oils, particularly sunflower oil (Ukraine and Russia are major producers and exporters). These factors have made palm oil more attractive to major importing countries due to lower overall import costs and shorter delivery times. Additionally, increasing trade tensions between China and Western countries could hurt the import and demand for edible oils from Western countries. Recently, China announced plans to start an anti-dumping investigation into canola imports from Canada after tariffs were imposed on Chinese electric vehicles.

Maintain NEUTRAL on the Sector

We maintain our 2024 CPO average selling price assumption of RM3,800/MT and RM3,600/MT for 2025 at this juncture, with an estimated trading range of approximately RM400/MT above or below RM3,800/MT for the remainder of the year. We are cautiously optimistic on plantation companies’ earnings outlook, supported by higher production and stable margin due to anticipated lower fertilizer costs, which may offset other higher operating costs. We reiterate our NEUTRAL call on the plantation sector due to the absence of new notable catalysts. For exposure, we favour IOI (BUY; TP: RM4.50) due to higher FFB output, lower costs and improved downstream earnings from the oleochemical and specialty fats sub-segments. We recently upgrade FGV to HOLD (TP; RM1.30) following better-than-expected results.

Source: BIMB Securities Research - 5 Sept 2024