PLANTATIONS
• Expect CPO price to be range-bound in short-term. Most planters are more upbeat on CPO price compared to the last quarter with most expecting CPO price to trade range-bound of between RM1,800-2,000 per tonne in the short-term. The more positive tone was due to concern of weaker soybean crops from South America, biological tree stress and heavier rainfall in parts of Malaysia leading to lower palm oil yields, lower palm oil stockpile in Malaysia and measures announced by the government to lower supplies and boost domestic consumption in the form of replanting incentives and biod
iesel mandates.
• Expect CPO price to be range-bound in short-term. Most planters are more upbeat on CPO price compared to the last quarter with most expecting CPO price to trade range-bound of between RM1,800-2,000 per tonne in the short-term. The more positive tone was due to concern of weaker soybean crops from South America, biological tree stress and heavier rainfall in parts of Malaysia leading to lower palm oil yields, lower palm oil stockpile in Malaysia and measures announced by the government to lower supplies and boost domestic consumption in the form of replanting incentives and biod
iesel mandates. • Mixed performances expected in the upcoming quarter. For the first
two months of the year, local CPO price averaged RM1,869 per tone which is higher than 4QCY08 average of RM1,606 per tonne but significantly lower than 1QCY08 average of RM3,477 per tonne. As such, we expect better qoq performances from plantation companies who sell their products
on spot basis for eg Asiatic and Sime Darby. However, the higher selling price achieved will be partially offset by lower production as 1Q is typically the lowest production quarter for the plantation companies. IOI Corp and KL Kepong which achieved high selling price in the last quarter due to forward sales position may register lower qoq earnings in the coming quarter as their new forward position are likely to be at a lower prices. With only 14% of its budgeted production locked in at RM2,800 per tonne, we expect HS Plant earnings to mirror the spot CPO prices. On a yoy basis, we expect all companies to report significantly lower plantation earnings due to lower selling prices.
• Lower fertiliser costs benefit more evidence in 2Q onwards. We understand most planters will only start enjoying the declining fertiliser prices of between 20-40% based on products types only in 2QCY08 due to some forward position or stock on fertiliser from the previous year, As such, we expect operating costs to remain fairly constant in the 1QCY09. Apart from fertiliser costs, plantation companies will also benefit from the
declining fuel costs. However, between the two, fertilisers make up a larger portion of between 30-40% of overall costs against fuel of less than 5%, based on rough estimates. We estimate that the operating costs could come down by around RM100 per tonne or 8-10% of cost of production in the current year if fertiliser prices stay at current level for plantation companies who buys fertiliser on three-month basis. However, plantation
companies who have locked in their fertiliser costs at low prices for the whole of last year in the early part of 2008 may see lower savings from the
declining fertiliser prices.
Hit and misses in the latest result season
• Mostly below our and consensus expectations. In the latest results
reason, 60% of the plantation companies under our coverage reported core earnings that were below our expectation. Against consensus, the ratio of underachievers’ was higher at 80%. Only KL Kepong’s 1Q09 results were above our expectation but in line with consensus due to better-thanexpected forward sales position.
• Key surprises on core earnings. IOI Corp and KL Kepong’s upstream plantation division performed better than our forecast due mainly to higher CPO price achieved thanks to forward sales positions locked in earlier. However, Asiatic and HS Plant’s plantation earnings were short of our forecast due to lower-than-expected FFB production and higher operating costs. Sime Darby results were in line with our expectation. However, we were taken aback by the 13% yoy decline in yields by its Indonesian estates in 1HFY09 and the larger losses at the downstream division compared to the previous year.
• IOI Corp has the most profitable upstream plantation division. IOI
Corp took over from Sime Darby as the most profitable upstream player in the recent quarter results, although its FFB production was only 40% of Sime’s FFB production for that quarter. IOI Corp’s upstream plantation unit posted RM528m profit, 142% higher than Sime Darby’s profit of RM218m
due to higher selling price achieved and lower operating costs. IOICorp achieved average CPO selling price of RM3,085 per tonne against
RM1,891 per tonne posted by Sime’s plantation estates in Malaysia, according to our estimates.
• Maintain UNDERWEIGHT call. We maintain our CPO price assumptions and earnings forecasts for all planters. We continue to UNDERWEIGHT the Malaysian planters due to their expensive P/E valuations and unexciting earnings prospects. The average forward P/E of the three big cap planters in Malaysia of 16x is 33% higher than our target market P/E of 12x and 51% higher than regional plantation P/E of 10.6x.
Valuation and recommendation
• Earnings and target price changes following results release. We raised our earnings projections of Asiatic by 2-3% for FY09-10 to account for lower operating costs and KL Kepong by 6-21% to account for higher forward sales position, after their recent results release. We have also lowered our FY09 net profit earnings forecast for IOI Corp by 5% to
account for the forex loss and lost deposit on Menara Citibank. There is no change to our Sime Darby earnings projection and we recently change our earnings forecast for HSPlant to align with the group’s new financial years. In line with the earnings changes, we upped our target price for Asiatic by 5sen to RM3.30 and lowered our target price for Hap Seng Plantation by 5sen to RM1.40. There is no change to our KL Kepong target price which is
based on 10% discount to SOP despite of the earnings changes because we have lowered our valuation for Yule Catto in our SOP valuation.
• No change to CPO price and earnings estimates. We are keeping our CPO price forecast of RM1,600 per tonne for 2009 and RM1,900 per tonne for 2010 post the results review. For the first two months of 2009, local CPO price averaged RM1,869 per tonne, which is higher than our full year forecast of RM1,600 per tonne due to concern of lower soybean crop supplies from South America due to drought and lower palm oil supplies due to biological tree stress and adverse weather condition in some oil palm areas. Despite of this, we are keeping our CPO price intact as (1) recent reports reveal that weather in South America planting regions have improved in the past few weeks, (2) concern of weaker demand in the coming months due to the worsening global economy outlook, (3)
expectation of higher soybean plantings by US farmers; and (4) improving palm oil supplies in the coming months due to seasonal pick up in yields.
• Maintain UNDERWEIGHT. We maintain our CPO price assumptions and earnings forecasts for all planters. We continue to UNDERWEIGHT the Malaysian planters due to their expensive P/E valuations against the KLCI as well as the regional planters. The average forward P/E of the three big cap planters in Malaysia of 16x is 33% higher than our target market P/E of 12x and 51% higher than regional plantation P/E of 10.6x. Key de-rating catalysts include lower CPO price and earnings downgrade by market.
two months of the year, local CPO price averaged RM1,869 per tone which is higher than 4QCY08 average of RM1,606 per tonne but significantly lower than 1QCY08 average of RM3,477 per tonne. As such, we expect better qoq performances from plantation companies who sell their products
on spot basis for eg Asiatic and Sime Darby. However, the higher selling price achieved will be partially offset by lower production as 1Q is typically the lowest production quarter for the plantation companies. IOI Corp and KL Kepong which achieved high selling price in the last quarter due to forward sales position may register lower qoq earnings in the coming quarter as their new forward position are likely to be at a lower prices. With only 14% of its budgeted production locked in at RM2,800 per tonne, we expect HS Plant earnings to mirror the spot CPO prices. On a yoy basis, we expect all companies to report significantly lower plantation earnings due to lower selling prices.
• Lower fertiliser costs benefit more evidence in 2Q onwards. We understand most planters will only start enjoying the declining fertiliser prices of between 20-40% based on products types only in 2QCY08 due to some forward position or stock on fertiliser from the previous year, As such, we expect operating costs to remain fairly constant in the 1QCY09. Apart from fertiliser costs, plantation companies will also benefit from the
declining fuel costs. However, between the two, fertilisers make up a larger portion of between 30-40% of overall costs against fuel of less than 5%, based on rough estimates. We estimate that the operating costs could come down by around RM100 per tonne or 8-10% of cost of production in the current year if fertiliser prices stay at current level for plantation companies who buys fertiliser on three-month basis. However, plantation
companies who have locked in their fertiliser costs at low prices for the whole of last year in the early part of 2008 may see lower savings from the
declining fertiliser prices.Hit and misses in the latest result season
• Mostly below our and consensus expectations. In the latest results
reason, 60% of the plantation companies under our coverage reported core earnings that were below our expectation. Against consensus, the ratio of underachievers’ was higher at 80%. Only KL Kepong’s 1Q09 results were above our expectation but in line with consensus due to better-thanexpected forward sales position.
• Key surprises on core earnings. IOI Corp and KL Kepong’s upstream plantation division performed better than our forecast due mainly to higher CPO price achieved thanks to forward sales positions locked in earlier. However, Asiatic and HS Plant’s plantation earnings were short of our forecast due to lower-than-expected FFB production and higher operating costs. Sime Darby results were in line with our expectation. However, we were taken aback by the 13% yoy decline in yields by its Indonesian estates in 1HFY09 and the larger losses at the downstream division compared to the previous year.
• IOI Corp has the most profitable upstream plantation division. IOI
Corp took over from Sime Darby as the most profitable upstream player in the recent quarter results, although its FFB production was only 40% of Sime’s FFB production for that quarter. IOI Corp’s upstream plantation unit posted RM528m profit, 142% higher than Sime Darby’s profit of RM218m
due to higher selling price achieved and lower operating costs. IOICorp achieved average CPO selling price of RM3,085 per tonne against
RM1,891 per tonne posted by Sime’s plantation estates in Malaysia, according to our estimates.
• Maintain UNDERWEIGHT call. We maintain our CPO price assumptions and earnings forecasts for all planters. We continue to UNDERWEIGHT the Malaysian planters due to their expensive P/E valuations and unexciting earnings prospects. The average forward P/E of the three big cap planters in Malaysia of 16x is 33% higher than our target market P/E of 12x and 51% higher than regional plantation P/E of 10.6x.
Valuation and recommendation
• Earnings and target price changes following results release. We raised our earnings projections of Asiatic by 2-3% for FY09-10 to account for lower operating costs and KL Kepong by 6-21% to account for higher forward sales position, after their recent results release. We have also lowered our FY09 net profit earnings forecast for IOI Corp by 5% to
account for the forex loss and lost deposit on Menara Citibank. There is no change to our Sime Darby earnings projection and we recently change our earnings forecast for HSPlant to align with the group’s new financial years. In line with the earnings changes, we upped our target price for Asiatic by 5sen to RM3.30 and lowered our target price for Hap Seng Plantation by 5sen to RM1.40. There is no change to our KL Kepong target price which is
based on 10% discount to SOP despite of the earnings changes because we have lowered our valuation for Yule Catto in our SOP valuation.
• No change to CPO price and earnings estimates. We are keeping our CPO price forecast of RM1,600 per tonne for 2009 and RM1,900 per tonne for 2010 post the results review. For the first two months of 2009, local CPO price averaged RM1,869 per tonne, which is higher than our full year forecast of RM1,600 per tonne due to concern of lower soybean crop supplies from South America due to drought and lower palm oil supplies due to biological tree stress and adverse weather condition in some oil palm areas. Despite of this, we are keeping our CPO price intact as (1) recent reports reveal that weather in South America planting regions have improved in the past few weeks, (2) concern of weaker demand in the coming months due to the worsening global economy outlook, (3)
expectation of higher soybean plantings by US farmers; and (4) improving palm oil supplies in the coming months due to seasonal pick up in yields.
• Maintain UNDERWEIGHT. We maintain our CPO price assumptions and earnings forecasts for all planters. We continue to UNDERWEIGHT the Malaysian planters due to their expensive P/E valuations against the KLCI as well as the regional planters. The average forward P/E of the three big cap planters in Malaysia of 16x is 33% higher than our target market P/E of 12x and 51% higher than regional plantation P/E of 10.6x. Key de-rating catalysts include lower CPO price and earnings downgrade by market.
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