The Malaysian plantation 4Q23 sector earnings are expected to decline QoQ and YoY, as production output declines post peak season and as the downtrending CPO prices should have a higher leverage on the returns.
RHB Investment Bank Berhad (RHB) in its Regional Sector Update today (Feb 7) said nevertheless, these factors should be largely reflected in the sector’s performance. RHB expects companies to post mostly in-line results this quarter, based on FFB output estimates.
RHB remains NEUTRAL on the sector with top picks, as they cited, being purer plantation plays like Ta Ann (TAH), Sarawak Oil Palms (SOP), Bumitama Agri (BAL), Golden Agri (GGR) and PP London Sumatra Indonesia (LSIP).
4Q23F earnings to fall QoQ for Malaysian and Indonesian planters…
QoQ FFB output was lower, post peak season while spot CPO prices contracted slightly.
In Malaysia, FFB output of the companies under RHB’s coverage dipped by an average of 0.6% QoQ, while spot CPO prices contracted by 2.6% QoQ in 4Q23.
In Indonesia, RHB estimates that 4Q23 FFB output for stocks under their coverage fell by a much larger 11.9% QoQ (based on seasonal trends) while CPO prices – net of taxes – decreased by 2.2% QoQ.
RHB believes the larger decline in output in Indonesia was due to the dry weather seen in Kalimantan and South Sumatra in 3Q.
… and also YoY
YoY, RHB should also see lower earnings for planters in both Malaysia and Indonesia, given the higher leverage CPO prices have on earnings vs output.
In Malaysia, while average FFB output rose by 4.5% YoY in 4Q23, spot CPO prices dropped 5.8% YoY. In Indonesia, FFB output is estimated to have risen 3.4% YoY in 4Q23, but net CPO prices fell 11.1% YoY.
4Q23F is likely to bring largely in-line earnings, based on RHB’s estimates of production levels alone, given the seasonally weaker output.
Two may underperform forecasts based on FFB output being Kuala Lumpur Kepong, and BAL, while only one may chalk results that are stronger than projected, ie FGV Holdings.
RHB expects eight planters to book numbers that are largely in line.
For planters with downstream operations in Indonesia, RHB expects margins to weaken QoQ and YoY in 4Q23, due to a smaller tax differential between upstream and downstream products of USD35/tonne (vs USD48 in 3Q23 and USD39 in 4Q22).
Conversely, Malaysian downstream counterparts may see slightly better QoQ margins due to the decrease in competition from Indonesia.
Maintain sector NEUTRAL, with a tactically positive trading strategy, as RHB continues to expect a higher CPO price environment in 1H24, in anticipation of a seasonally weaker output and El Nino impact.
RHB continues to prefer upstream players for now, with Top Picks being TAH and SOP in Malaysia, BAL and GGR in Singapore, and LSIP in Indonesia.
They said top picks target price for Ta Ann (TAH MK) – BUY MYR4.00 Sarawak Oil Palms (SOP MK) – BUY Bumitama Agri (BAL SP) – BUY MYR2.95 SGD0.70 Golden Agri (GGR SP) – BUY SGD0.30 London Sumatra (LSIP IJ) – BUY IDR1,040.
The main downside risks to RHb’s outlook include Russia-Ukraine war being prolonged and exacerbated; significant changes in the crude oil price trend that may result in changes made to biodiesel mandates; weather abnormalities resulting in an oversupply or undersupply of vegetable oils; significant changes in the demand for vegetable oils, caused by changes in economic cycles or price dynamics; worsening labour situation in Malaysia causing production to be affected negatively; revision in Indonesia’s tax structure and trade policies; resurgence of COVID-19 cases; and more ESG issues pinpointed for listed companies.
