KEY INVESTMENT HIGHLIGHTS

• Higher CPO selling price in line with industry average
• Downstream profit reversed to black
• Earnings estimates; maintain
• Maintain BUY with an unchanged TP of RM6.10

Seasonally high earnings cycle. The 3QFY24 PATAMI came in at RM83.1m (+3.1%yoy), brings the 9MFY24 to RM211.0m (+10.9%yoy), driven by higher CPO and PK selling price despite there was a slower FFB production during the quarter mostly due to low cropping trend. Overall earnings were within our and consensus estimates, making up about 75% and 77% of respective full-year estimates.

Upstream & Downstream. Profit for upstream was flat RM116.1m, while the downstream reversed to black at RM0.5m, respectively. Margins for upstream division flattish to 18.9% (-0.3 ppt), following lower FFB output recorded in the quarter, as the fixed cost maintained. This resulting cost of production to hover around RM2,600-2,700/Mt. Surprisingly, demand for derivative products improved, making the utilisation rates for both refinery and biodiesel plant surged to 25-30%. This led to margins expansion due to healthy refining margin it was able to fetch.

Operational performance. FFB production experienced a decline of - 6%qoq, mainly due to the impact of biological tree rest. However, production in Indonesia remained strong, thanks to the favourable age profile and expanded harvesting areas. Meanwhile, production in Malaysia remained subdued due to large-scale replanting activities, covering approximately 3,500 ha and a wet weather spell that made the FFB evacuation process more challenging. Average selling prices on the other hand, were slightly higher at RM3,725/Mt (3Q23; RM3,409/Mt) and RM2,590/Mt respectively, for CPO and PK.

Outlook. The production of FFB is expected to decrease year-on-year due to the adverse effects of weather conditions and biological tree rest.

However, the expansion and progression of existing mature areas into higher-yielding brackets in Indonesia may help mitigate some of this decline. Additionally, the ongoing replanting activities in Malaysia could have a moderating effect on the Group's overall production growth.

Meanwhile, the downstream outlook remains challenging, given the intense competition from Indonesian counterparts following recent changes in Indonesian export levies and the overcapacity of refineries in Indonesia.

Recommendation. Maintain BUY call with an unchanged TP of RM6.10, derived from PER of 16.9x (nearly 2y average historical +1SD) pegging to FY25F EPS of 35.9sen.

Source: MIDF Research - 28 Nov 2024