Plantation –Singapore - UOB Kay Hian 2017-08-21: 2Q17 Results ~ Weaker Earnings Qoq On Lower Production

Plantation – Singapore - UOB Kay Hian 2017-08-21: 2Q17 Results: Weaker Earnings Qoq On Lower Production Singapore Plantation Stocks FIRST RESOURCES LIMITED EB5.SI BUMITAMA AGRI LTD. P8Z.SI GOLDEN AGRI-RESOURCES LTD E5H.SI

Plantation – Singapore - 2Q17 Results: Weaker Earnings Qoq On Lower Production

  • 2Q17 production was within expectation. 
  • First Resources (FR)’s results were below expectations due to lower sales volume. Bumitama (BAL) outperformed peers with positive qoq earnings growth supported by the strongest production growth for 2Q17. 
  • We expect the production recovery to continue in 2H17, but the yoy increase in 2H17 will be smaller, and there will be better refining margins for 2H17. BAL is likely to outperform its peers in 2H17 on stronger production and lower costs. 
  • Maintain MARKET WEIGHT.



WHAT’S NEW


2Q17 results wrap-up. 

  • 2Q17 performance of First Resources (FR) was below expectations, while Bumitama’s (BAL) and Golden Agri’s (GGR) results were in line.
  • BAL’s results outperformed peers, recording a qoq increase in net profit vs other peers which registered lower qoq earnings. BAL’s strong earnings were mainly supported by higher qoq fresh fruit bunch (FFB) production, better than peers’ OER and lower operating costs. 
  • BAL's stronger qoq production growth was supported by strategically located estates, a prime age profile and larger new mature areas.

More production to come in 2H17. 

  • We expect FFB production to continue improving in 2H17 on the back of yield recovery as the lagged impact from El Nino is weakening. For 1H17, 13 Indonesian companies (from which we collected data) reported a FFB production improvement of 26.3% yoy. The yoy production growth in 2H17 is likely to be lower than 1H17’s due to the high base in 2H16’s, especially for 4Q16. Oil World is forecasting 2017 CPO production at 35.65m tonnes (+11% yoy).

Location does matter for the production recovery momentum. 

  • Kalimantan registered stronger production in 2Q17. Companies with higher exposure in Kalimantan reported positive qoq FFB production growth. However, Sumatra-based companies reported lower production qoq. This was due to different cropping patterns within these two regions. 
  • For 2H17’s production pattern, we reckon Sumatra is likely to see delays in monthly production peaks (from the usual August-September), while 4Q is likely to remain as the strongest quarter for Kalimantan.

CPO production did not increase in the same quantum as FFB production in 1H17, possibly due to lower OER. 

  • CPO production rose 20.7% yoy in 1H17, which is lower than the FFB production growth of 26.3% yoy (refer to RHS tables). This could be due to lower OER as the oil formation phase of the fruitset was affected by the high rainfall in 1H17.

BAL revises up FFB production guidance. 

  • During the 2Q17 results briefing, all plantation companies under our coverage maintained their FFB production guidance, except BAL. BAL is now expecting 2017 FFB production to increase 25% yoy (+15% yoy previously) in anticipation of a stronger yield recovery. 
  • On average, companies are expecting FFB production to increase 17.5% yoy in 2017.


ACTION 


Maintain MARKET WEIGHT. 

  • We have HOLD calls on First Resources (FR) and Golden Agri (GGR) as we reckon that current prices have already factored in the higher production and earnings expected for 2H17. In the meantime, there are rising concerns on the potential CPO price weakness going into 2018 with another round of higher palm oil production and bumper soybean crops to come, while palm oil demand is expected to be stagnant.
  • However, we have a BUY call on Bumitama (BAL). We like BAL as its young tree age profile, which spells strong production, will partly offset the CPO price weakness going into 2018.


ESSENTIALS


CPO price expected to hover at current level in 3Q17 due to low stock level.

  • Indonesia Dumai/Belawan CPO prices have been hovering in the range of US$630- 680/tonne since Jun 17. One of the key factors was tight FFB supply despite FFB production having increased in the past few months, as inventory level was extremely low since early this year. Apart from this, the other key factors were:
    1. recent higher imports from China to replenish the stocks, and
    2. rally in soybean prices. 
  • We reckon that significant CPO prices weakness will kick in 2018 when inventory piles up.

Biodiesel delivery has returned to normal. 

  • We understand that biodiesel delivery was delayed in May-Jun 17 due to the contract being awarded at a later-than-expected date, as well as some logistics issues in Pertamina. Nevertheless, biodiesel delivery volume has returned to normal levels since end-Jun 17. The volume that was not delivered in May-Jun 17 is not recoverable. 
  • Meanwhile, biodiesel subsidy has been reduced to a pricing formula of CPO base price+US$100/tonne from CPO base price+US$125/tonne. This will affect operating margin, but it is still profitable for companies under our coverage.
  • Meanwhile, we gather that the upcoming fifth biodiesel contract allocation (for Nov 17-Apr 18) could potentially be higher than the fourth biodiesel contract as the delay in delivery in May 17 has resulted in more CPO funds being made available for the upcoming contract.
  • All companies under our coverage have exposure to Pertamina biodiesel contracts in Indonesia.

Better refinery & processing margin in 2H17. 

  • 2Q17 refining margins were dragged down by the high raw material prices as the steep backwardation in CPO future prices led to lower processing margins. 
  • Processed products were usual sold forward based on forward prices while raw materials were sourced months ahead. As such, lower futures prices would lead to lower pricing power for processed products. 
  • However, 2H17 could see better margin as forward prices are trending up which suggests higher futures price and better pricing power for processed products. This is positive to GGR’s and FR’s downstream businesses.


SECTOR CATALYSTS 

  • Higher biodiesel consumption.
  • Worse-than-expected labour shortage.


ASSUMPTION CHANGES 

  • No changes. Maintain average CPO prices assumption of RM2,600/tonne and RM2,400/tonne respectively for 2017 and 2018.


RISKS 

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.







Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-21
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.950 Same 1.950
BUY Maintain BUY 1.030 Same 1.030
HOLD Maintain HOLD 0.340 Same 0.340



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