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Asia Palm Oil Sector - New report: 1Q18—Off to a weak start

Shared By Stock Fanatic on Monday, June 18, 2018 | 18.6.18

● Oil palm planters had a muted 1Q18 performance. Despite rising production volumes, lower selling prices dragged down profits. Out of the 12 companies covered, 10 disappointed while two (Sime Plant & Bumitama) were in line with our expectations.

● We expect 2018 crude palm oil (CPO) prices to trade within RM2,400-2,500/t range supported by: 

(1) Brent crude price of ~US$70/bbl, 

(2) increased domestic biodiesel consumption in Indonesia, and 

(3) price discount between CPO and other major vegetable oils (current discount between CPO & soy oil is at 6%, above its long term average).

● What to expect in 2Q18. Assuming CPO prices stay at RM2,400/t levels, we believe Indonesian companies should experience an increase in QoQ earnings as production ramps up while Malaysia may experience a flattish QoQ.

● We continue to like the upstream players. Our picks in the sector are: Sime Plant (SDPL MK), Genting Plant (GENP MK), London Sumatra (LSIP JK) and Bumitama (BAL SP).

Despite rising production volumes, lower CPO and palm kernel (PK) selling prices dragged down 1Q18 profits for palm oil planters. Planters with significant exposure to Indonesian estates experienced a YoY drop in fresh fruit bunches (FFB) output as:

● Indonesia was affected by El Nino at a later stage compared to Malaysia. Hence, its FFB output recovery lags that of Malaysia.

● Some areas in Indonesia experienced extremely wet weather, affecting harvesting activities (fruit spoilage and lower oil extraction rate (OER)).

Malaysia
IOI Corp – Despite strong FFB output recovery (+32% YoY), plantation EBIT -2% YoY. Main culprits were lower CPO and PK selling prices, exacerbated by reduction in OER. 1Q18 PAT was 10% higher YoY mainly due to net forex gains.

Sime Plant – FFB output -5% YoY due to poor weather in Indonesia (Kalimantan). Downstream EBIT +51% YoY as the company continues to focus on higher-value specialised products.

KLK – FFB output +5% YoY as Indonesian estate recovery remained muted. Meanwhile, downstream EBIT +65% YoY supported by higher sales volume and favourable margins.

Genting Plant – Stripping off the inter-segment CPO inventory drawdown, plantation EBIT -33% YoY. Downstream operations were unexciting as well (unchanged YoY).

Singapore
IFAR – FFB nucleus production -6% YoY, resulting in the rise in third-party FFB processed, particularly in South Sumatra and Kalimantan. Mgmt expects 2018E production growth to be 5-10%.

FRLD – FFB output -13% YoY, while CPO output +19% YoY. Delay in transportation caused inventory build-up, in addition to drop in ASP, caused decline in 1Q earnings. 2018E FFB nucleus production to grow ~10-15%.

GGR –FFB production -11% YoY due to poor weather in East and South Kalimantan and Sumatra. 2018E FFB production growth to be within 5-10% for year.

BAL – FFB production +20% YoY while CPO production +17% YoY. Decline in earnings were mainly due to lower CPO prices. Management guided 2018E FFB production growth at 15-20%.

WIL – FFB production +5% YoY as yield improved to 4.9MT/ha in 1Q18 (vs 4.6MT/ha in 1Q17). Sugar business was impacted by delay in sales, while Oilseeds and Grains PBT was down most likely due to lower crush margins. Listing of China operations remains on track, with target deadline of 3Q19.

Indonesia
AALI – FFB production -7% YoY while CPO output remained flat YoY due to an increase in third party purchases.

SIMP – FFB production -6% YoY while CPO production -12% YoY.

LSIP - Nucleus FFB production +2% YoY, but external production -35% YoY, resulting in CPO output -7% YoY.

What to expect in 2Q18
According to Indonesia Palm Oil Association (IPOA) and Malaysian Palm Oil Board (MPOB) data, Indonesia is experiencing a YoY increase in production (Apr-2018 was +14%) while Malaysia is going through a flat-to-slightly below quarter so far.

Assuming CPO prices stay at RM2,400/t levels in 2Q18, we believe Indonesian companies should see an increase in QoQ earnings while Malaysia may experience a flattish QoQ.

Source : Credit Suisse Asia Pacific Equity Research
(Read Report)

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Posted on Monday, June 18, 2018 | 18.6.18
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