Plantation - UOB Kay Hian 2016-11-22: 3Q16 Results Review ~ Pick-up In Production Supports Performance

Plantation - UOB Kay Hian 2016-11-22: 3Q16 Results Review ~ Pick-up In Production Supports Performance Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  WILMAR INTERNATIONAL LIMITED F34.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Plantation - 3Q16 Results Review ~ Pick-up In Production Supports Performance

  • 3Q16 results were within expectations. Earnings improved qoq on the back of a qoq rise in production. 
  • We are expecting a stronger performance for 4Q16 as production is likely to continue to pick up, as well as with the support of higher CPO prices. The pace of decline in production in Indonesia for 4Q16 will be slower than in Malaysia.
  • We prefer Indonesia-based companies and maintain our top picks: BAL, FR and GGR. Maintain OVERWEIGHT.



WHAT’S NEW


3Q16 results within expectations. 

  • All companies under our coverage reported satisfactory results for 3Q16. Earnings increased qoq on the back of pick-up in production. 
  • We also note that refining margins have improved qoq in 3Q16 except for Wilmar International (Wilmar). However, their results remained subdued yoy for 9M16, mainly on weak production due to the lagged impact from the drought.
  • 4Q16 earnings could be better than in 3Q16. The earnings recovery momentum likely to continue into 4Q16 on the back of:

Better production. 

  • During the recent briefing, all companies indicated that FFB production is likely to peak in Oct 16, and then decline gradually in Nov-Dec 16.
  • Meanwhile, Kalimantan-based companies such as Bumitama (BAL) are likely to register a stronger production in 4Q16 as the lagged impact from drought is less severe in Kalimantan. 2H16 CPO production is likely to contribute about 60% of full-year production in 2016.

Expect higher CPO ASP. 

  • Average Dumai/Belawan CPO prices for 1 Oct 16 to 18 Nov 16 was US$685/tonne vs 3Q16’s average of RM682/tonne. We are expecting CPO prices to hover in the range of US$680-720/tonne in 4Q16. Thus, the company that can deliver stronger production in 4Q16 will benefit from the higher CPO prices.

Better palm refining margins. 

  • Refining margin in 4Q16 is expected to be slightly better than 3Q16 as the supply of raw materials will not be as tight as in 3Q16 in Indonesia.
  • However, the risk to this segment is the hedging of their currency exposure under the recent volatile currencies movement.


ACTION


Maintain OVERWEIGHT. 

  • We expect CPO prices to stay firm and trend higher into 1H17.
  • We forecast CPO prices of RM2,500/tonne for 2016 (2015: RM2,158) and RM2,600/tonne for 2017.

Top picks. 

  • Singapore-listed plantation companies are still our preferred picks. We like: 
    1. BAL (Target: S$1.25) for its stronger earnings growth driven by positive production growth and highest leverage to CPO prices, 
    2. FR (Target: S$2.00) for its efficiency in keeping costs low, being a beneficiary of Indonesia’s biodiesel mandate and earnings momentum picking up in 2H16 to reflect higher ASP and production, and 
    3. GGR (Target: S$0.42) for its highest beta to CPO prices.


ESSENTIALS


BAL and FR show strongest production recovery qoq in 3Q16. 

  • BAL’s and FR’s FFB productions increased 46.7% qoq and 43.3% qoq respectively for 3Q16, which is the highest among their peers. This could potentially due to: 
    1. their estates being less affected by the lagged impact from drought, 
    2. young age profile, and 
    3. large areas coming into maturity. 
  • For 9M16, BAL’s FFB production showed a lesser quantum of decline compared with its peers. 
  • We are expecting BAL’s FFB production to continue to pick up in 4Q16 and are anticipating 2016 FFB production growth of -4.4% yoy, which is in line with management’s guidance.

WIL’s downstream margin squeezed in 3Q16, in contrast with FR and GGR. 

  • WIL’s 3Q16 PBT margin was squeezed to 3.9% (2Q16: 4.5%) as its Indonesian downstream operations competed to get feedstock by offering better prices for CPO. This is in contrast with its peers FR and GGR which showed margin improvement in 3Q16.


ASSUMPTION CHANGES

  • None.


SECTOR CATALYSTS


Weather disruption. 

  • Agricultural production has been impacted by extreme weather.
  • Any negative impact from the weather would be positive to prices.

Occurrence of La Nina. 

  • According to NOAA, La Niña conditions could persist (~55% chance) through winter 2016-17. Should La Nina develop during this year-end, it will affect the soybean planting in Argentina, which will lead to higher soybean prices, and in turn be positive to CPO prices. 


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.
  • Demand rationing due to strong recovery in CPO prices.



PEER COMPARISON






Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-22
UOB Kay Hian Analyst Report BUY Maintain BUY 2.00 Same 2.00
BUY Maintain BUY 1.25 Same 1.25
SELL Maintain SELL 3.05 Same 3.05
BUY Maintain BUY 0.42 Same 0.42
NOT RATED Maintain HOLD 99998 Same 0.80




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