Singapore Plantation - UOB Kay Hian 2017-05-18: 1Q17 Results Review ~ Weaker Qoq On Seasonality

Plantation – Singapore - UOB Kay Hian 2017-05-18: 1Q17 Results Review: Weaker Qoq On Seasonality Singapore Plantation Stocks Sector Outlook WILMAR INTERNATIONAL LIMITED F34.SI BUMITAMA AGRI LTD. P8Z.SI GOLDEN AGRI-RESOURCES LTD E5H.SI FIRST RESOURCES LIMITED EB5.SI INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Plantation – Singapore - 1Q17 Results Review: Weaker Qoq On Seasonality

  • First Resources (FR) and Wilmar International (WIL)’s 1Q17 results were above expectations, while Bumitama (BAL)’s results were below estimates and Golden Agri (GGR)’s were in line. 
  • Overall sector performance was weaker qoq due to lower production on seasonality, but stronger yoy on a production recovery and strong CPO prices. 
  • We expect companies under our coverage to report uneven earnings growth in 2Q17. However, BAL is likely to outperform its peers in 2Q17 on a strong production recovery and lower costs. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


Mixed 1Q17 results. 

  • All the companies under our coverage except Golden Agri (GGR) registered weaker results qoq for 1Q17 due to lower production on seasonality but this was partly offset by higher CPO prices. 
  • First Resources (FR) and Wilmar International’s results came in above expectation mainly due to higher-than-expected CPO sales volume and palm kernel prices for the former, while stronger-than-expected contribution from the oilseeds and grains division boosted the performance of the latter’s. 
  • On the flipside, Bumitama (BAL) registered weaker-than-expected results in 1Q17 mainly due to the front-loaded fertiliser costs. Meanwhile, GGR’s results were within expectations.


Mixed 2Q17 production outlook. 

  • During recent briefings, companies under our coverage guided for differing production outlooks for 2Q17. BAL and WIL are expecting production to improve qoq on the back of a yield recovery, while FR and GGR indicate that production could be weaker qoq mainly due to the 20-24 months of lagged impact from the severe drought in 2015. 
  • We reckon the discrepancy in production outlook could be due to the difference in severity and timing of dryness as well as the age profile of trees. We understand that young trees tend to recover faster than the old trees.
  • Moreover, North and South Sumatra, Southern part of West Kalimantan, East Kalimantan experienced more severe and longer droughts compared to other regions. 
  • All in all, we are expecting Indonesia’s production pattern to be similar to 2016’s whereby production could be flat or slightly weaker qoq in 2Q17, but significantly higher yoy on the back of a yield recovery.

Expect stable CPO prices in 2Q17. 

  • Average Dumai/Belawan CPO prices for 1 Apr 17 to 16 Mar 17 was at US$676/tonne vs 1Q17’s average of US$739/tonne and 2Q16’s average of US$681/tonne. 
  • We are expecting CPO prices to trade in the range of RM2,400-2,700/tonne in 2Q17 on the back of a potential slowdown in production recovery and better demand from the Middle East and some Africa countries for the preparation of Hari Raya in Jun 17. However, CPO prices are expected to further weaken in 2H17 in the event of palm oil supply outweighing demand.


ACTION


Maintain OVERWEIGHT. 

  • We expect CPO prices to stay firm in 1H17 and to weaken in 2H17 when production recovers and inventory starts to pile up. We forecast CPO prices would average RM2,600/tonne for 2017 (2016: RM2,653) and RM2,500/tonne for 2018.
  • We are reviewing our sector weighting on the back of: 
    1. a likely increase in palm oil supply in 2H17 on the back of a production recovery, 
    2. demand being weaker than expected on less demand from Indonesia’s biodiesel blending and stagnant demand from key importing countries such as China and India, and 
    3. anticipation of ample soybean supply from the US.


ESSENTIALS


Lower biodiesel volume secured and lower biodiesel subsidies. 

  • All plantation companies under our coverage secured lower biodiesel volumes for the period of MayOct 17, except for GGR which secured a 25% increase in biodiesel volume compared with Nov 16-Apr 17’s allocation. 
  • We also gather that the biodiesel subsidy will change to incorporate the new pricing formula of a “CPO base price+US$100/tonne” from the “CPO base price+US$125/tonne”, and is most likely to be effective Jun 17. 
  • Despite the change in biodiesel subsidy, it is still profitable to companies.


FFB yield recovered yoy, but OER dipped yoy in 1Q17. 

  • All the companies under our coverage reported FFB yield recoveries in 1Q17, in the range of 9-29% yoy, in contrast to OER which dipped yoy. The lower OER could have been due to 1Q17’s high rainfall which usually leads to more water content in FFB.


ASSUMPTION CHANGES

  • No change on our CPO price expectations for 2017-18.


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.


SECTOR CATALYSTS

  • Weather disruption. Agricultural production is usually impacted by extreme weather. Any negative impact from the weather would be positive to prices.
  • Demand from key importing countries picking up significantly. Higher demand from Indonesia’s non-PSO.








Singapore Research Team UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.400 Same 4.400
BUY Maintain BUY 1.250 Same 1.250
HOLD Maintain HOLD 0.450 Same 0.450
BUY Maintain BUY 2.150 Same 2.150
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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