Plantation – Singapore - UOB Kay Hian 2017-03-03: Expect FFB Production To Recover In 2017

Plantation – Singapore - UOB Kay Hian 2017-03-03: Expect FFB Production To Recover In 2017 BUMITAMA AGRI LTD. P8Z.SI FIRST RESOURCES LIMITED EB5.SI WILMAR INTERNATIONAL LIMITED F34.SI GOLDEN AGRI-RESOURCES LTD E5H.SI INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Plantation – Singapore - Expect FFB Production To Recover In 2017

  • 4Q16 results were mixed. BAL’s and FR’s results were above expectations on the back of higher sales volume and prices, while WIL’s results were in line. However, GGR’s came in lower than expected. 
  • All companies have guided for double-digit FFB production growth in 2017, while CPO prices are likely to weaken when production recovers and inventory starts to pile up in 2H17. 
  • Expect weaker earnings in 1Q17 as it will be a seasonally weak production quarter. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


Mixed 4Q16 results. 

  • All companies under our coverage registered stronger results qoq for 4Q16 on the back of strong recovery of fresh fruit bunch (FFB) production and higher crude palm oil (CPO) prices. 
  • Bumitama Agri’s (BAL) and First Resources’ (FR) results were above expectation due to higher-than-expected palm kernel (PK) and CPO sales volume and strong PK prices, while Wilmar International’s results (WIL) came in within expectation. However, GGR’s results were below our expectation due to underperformance of the palm & lauric division.

FFB production dropped in 2016… 

  • All plantation companies registered drop in FFB production in 2016, in the range of -4.6% yoy to -27.7% yoy due to lower FFB yield as the lagged impact from the severe drought. 
  • BAL and FR reported the smallest drop in production, merely drop -4.6% yoy and -6.4% yoy in 2016 as supported by the new mature areas and young age profile.

…but expect FFB production to recover in 2017. 

  • All companies guided that FFB production is expected to increase by double digits in 2017 as the impact from El Nino is weakening. FFB production is expected to weaken in 1Q17 and then gradually pick up in 2Q17, while strong recovery and yield normalisation is expected to be seen from 3Q17 onwards. 
  • We are expecting BAL and FR to show a strong 18% yoy recovery in FFB production in 2017, which is the highest among the peers, supported by new mature areas, speedy yield recovery from young age trees and strategic estate location.

1Q17 earnings likely to be weaker qoq. 

  • Earnings could come in lower qoq in 1Q17 due to weaker FFB production, which could be impacted by seasonally weak production period. However, this will partly be mitigated by higher CPO prices. 
  • Average Dumai/Belawan CPO prices for 1 Jan 17 to 1 Mar 17 was US$759/tonne vs 4Q16’s average of RM708/tonne.


ACTION


Maintain OVERWEIGHT. 

  • We expect CPO prices to stay firm in 1H17, and then weaken in 2H17 when production recovers and inventory starts to pile up. 
  • We forecast average CPO prices of RM2,600/tonne for 2017 (2016: RM2,653) and RM2,500/tonne for 2018.

Top picks. 

  • Singapore-listed plantation companies are still our preferred picks. We like: 
    1. BAL (Target: S$1.25) for its young tree age profile, which spells strong production, as well as its hands-on estate management which enables BAL to consistently deliver a high OER. BAL’s share price is lagging behind its peers, providing the greatest upside. 
    2. FR (Target: S$2.15) for its efficiency in keeping costs low and also strong positive FFB production growth.


ESSENTIALS


Lower FFB yield and OER in 2016. 

  • FFB yield and OER declined yoy in 2016 as they were suppressed by the lagged impact from the drought. All companies under our coverage registered double-digit drops in FFB yield, ranging from -11.2% yoy to -18.8% yoy. 
  • Nevertheless, we noticed that FFB yield has experienced strong recovery in 4Q16 due to peak production period, as well as a weakening impact from the severe drought.

PK prices increased significantly yoy in 2016. 

  • The percentage increase in PK prices is higher than that of CPO prices in 2016. PK prices increased close to 50% yoy in 2016 mainly due to the lower PK production in tandem with low FFB production, as well as tight supply of close substitute coconut oil.


ASSUMPTION CHANGES

  • No changes.


SECTOR CATALYSTS

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


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.







Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250
BUY Maintain BUY 2.150 Same 2.150
SELL Maintain SELL 3.500 Same 3.500
HOLD Maintain HOLD 0.450 Same 0.450
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000





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