Plantation - UOB Kay Hian 2016-03-04: 4Q15 Results Round-up ~ Low Prices Are Over, Look Ahead

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Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  WILMAR INTERNATIONAL LIMITED F34.SI 

Plantation – Singapore 4Q15 Results Round-up: Low Prices Are Over, Look Ahead 

• 4Q15 results were largely in line with expectations but full-year earnings were dragged down by lower CPO prices. 
• FR disappointed with a downstream loss. 
• Companies with downstream exposure performed better as the new export levy gives a cost advantage to downstream products. 
• For 2016, all companies guided lower FFB production growth of 0% to -5%, except for BAL which still expects an 8% growth due to its younger age profile. 
• Maintain OVERWEIGHT on the sector. 

WHAT’S NEW 

• 4Q15 results mainly within expectations except for First Resources (FR, below expectation). 

• 2015 earnings were mainly dragged down by lower crude palm oil ASP with fresh fruit bunch (FFB) production growth of 3.3-14.0% yoy. 
• Plantation companies with larger planted areas in Kalimantan showed better production in 4Q15. Kalimantan production peaks in 4Q vs 3Q in Sumatra. 
• Downstream profits were better in 2015 except for FR, which surprised with a downstream loss due to the timing of its raw materials purchases. 

Guidance for 2016: 

• Weaker production outlook. 

• This is the first time plantation companies are guiding for production growth of 0% to -5% for 2016 as the dry weather hit across all the regions in 2015. 
• The only exception is Bumitama Agri (BAL), which is guiding an 8% production growth (2015: +14.2%). 

• New planting down substantially. 

• New planting is clearly in a sharp downtrend. 
• New planting areas (for the five companies under our coverage) peaked in 2007 and has since been in a downtrend. This is due largely to more stringent sustainable requirements by the authorities, customers, investors and NGOs. It also indicates slower supply growth going forward. 

• Realisation of biodiesel volume better than expected. 

• Of the five companies under our coverage, Wilmar (WIL), FR and BAL were awarded biodiesel contracts from Pertamina for Nov 15-Apr 16 delivery. All three confirmed that delivery has been smooth as all the documentation was properly done and the realisation rates ranged from 80% to 100%. The next tender will be awarded by end-April or early-May and all three are confident of getting their allocation again. 
• Golden Agri’s (GGR) biodiesel plant is only ready by 3Q16 and it will miss this tender, while Indofood Agri (IFAR) has no exposure to biodiesel. 

ACTION 

• Maintain OVERWEIGHT. 

• We expect CPO prices to trend higher in 2016 as the inventory drawdown is likely to be fast entering 1Q16. 
• Palm oil production in Malaysia and Indonesia are expected to slow down substantially on seasonally low production and the lagged impact from the dry weather. 
• Moreover, the commitment from these two major palm oil producing countries to increase domestic biodiesel blend will raise demand and lower inventory levels 

• Top picks: 

• We like FR (FR SP/Target: S$2.00) and BAL (BAL SP/Target: S$1.10) for their younger tree age profiles and exposure to Indonesia’s downstream operations. 
• We also like WIL (WIL SP/Target: S$3.60) as its integrated business model translates into more stable earnings while margins should improve on higher utilisation rate and better commodity prices. 

ESSENTIALS 

• Best earnings in 2015: GGR and Wilmar. 

• Both reported flattish net profit for 2015 despite low CPO prices, mainly supported by thier non-upstream operations. GGR’s performance was commendable as its China operation turned in a profit and its palm & lauric division delivered better margins 

• Best FFB production growth: BAL and FR. 

• Both delivered mid-teen growth, supported by a young age profile, newly mature areas and acquisition of planted areas. 

• Best CPO production growth: BAL 

• BAL with a higher growth of 20% as it took on more third-party FFB to increase the utilisation rate at its new mills. 
• On CPO production, BAL surpassed FR in 2015 as FR took on fewer third-party FFB. 
• GGR has the highest CPO volume of 2.4m tonnes in 2015, or 3.8% of global CPO production. 

SECTOR CATALYSTS 

• Weather disruption. 

• Agricultural production has been impacted by extreme weather conditions. Any negative impact from the weather would be positive to prices. The weather remains a key concern at this point, even for the soybean production outlook for Argentina and Brazil. 

ASSUMPTION CHANGES 

• We maintain our CPO price forecasts at RM2,500/tonne for 2016 and RM2,600/tonne for 2017. 

RISKS 

• Backtracking of biodiesel mandate in Indonesia and Malaysia after the recent fall in crude oil prices. 

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-04

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