Plantation Q1 Earnings Missed But Fundamentals Improving

Purchase order (PO) inventory rose to 1.75m tonnes in May, driven by higher production, but offset by higher exports.

RHB Investment Bank (RHB), in its Regional Sector Update today (June 11), said they expect PO inventory to remain below the 2m tonne mark, at least until June. Main catalyst to look out for remains La Nina – whose probability rose to 87% in 4Q24.

RHB maintains a sector NEUTRAL call with top picks now a mix of pure and integrated planters – Sarawak Oil Palms, IOI Corp (IOI), and PP London Sumatra Indonesia (LSIP).

Nine planters missed estimates, while three were in line. The downside surprises came from several issues ranging from lower-than-expected output (FGV Holdings (FGV), Ta Ann (TAH), Bumitama Agri, Golden Agri), higher-than-expected unit costs (SD Guthrie, IOI and TAH), higher-than-expected downstream losses (First Resources) lower-than-expected associate contributions (Kuala Lumpur Kepong (KLK), IOI, Wilmar International).

RHB made no changes to their CPO price assumptions – MYR3,900 and MYR3,800 per tonne for 2024 and 2025.

In Malaysia, total output slipped 23.2% QoQ but increased marginally by 3.4% YoY in 1Q24. FFB output of the companies under RHB’s coverage, however, slipped by an average of 21.6% QoQ but rose slightly by +1.5% YoY in 1Q24.

In Indonesia, RHB saw an average 21.6% QoQ and 8% YoY output decline for the companies they cover in 1Q24. As usual, figures from the official Association of Indonesian Palm Oil Producers or GAPKI differed, as YTD-Feb 2024 CPO output showed a positive output growth of 4.4% YoY.

Weather has normalised since April-May in Indonesia and production should start to pick up in the coming months.

Indonesian planters continue to expect to see flattish-to-moderate output growth of 0-5% in 2024, while Malaysian planters expect FFB growth in the mid-to high-single digits.

For those with downstream operations in Malaysia and Indonesia, RHB saw a mix of margin trends, with two companies posting better QoQ margins in 1Q24 (KLK and IOI), and two companies which saw weaker QoQ margins (SD Guthrie and FGV).

The weaker QoQ margin was due to weaker margin in Asia-Pacific, while the stronger QoQ margin was from improved demand in the EU and US.

In Indonesia, although there were no segmental breakdowns given in 1Q24, RHB believes QoQ margin has improved, as the tax differential between upstream and downstream products widened slightly.

Going forward, downstream players continue to guide for better margins in 2024, as importing countries have run down their inventory levels and feedstock prices see higher price volatility.

Inventory levels were flattish at 1.75m tonnes in May, (from 1.74m tonnes in April) due to improving production (+13.5% MoM) but offset by higher exports (+11.7% MoM).

Going forward, RHB expects stock levels to gradually improve but remain below the 2m-tonne mark, at least until June, when the peak season starts in earnest.

In keeping the NEUTRAL call, RHB continues to watch out for the possibility of La Nina in 3Q-4Q24, as the probability has risen to 87%.

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