Plantation – Singapore - UOB Kay Hian 2017-11-16: 3Q17 Results Review ~ Uneven Production Recovery Pattern

Plantation – Singapore - UOB Kay Hian 2017-11-16: 3Q17 Results Review: Uneven Production Recovery Pattern Plantation Stocks Singapore WILMAR INTERNATIONAL LIMITED F34.SI BUMITAMA AGRI LTD. P8Z.SI GOLDEN AGRI-RESOURCES LTD E5H.SI FIRST RESOURCES LIMITED EB5.SI

Plantation – Singapore - 3Q17 Results Review: Uneven Production Recovery Pattern

  • Post 3Q17 results announcement, companies with higher exposure to Central and South Sumatra and East and South Kalimantan revised down guidance for production growth. This was attributable to lower-than-expected FFB yield. 
  • However, we still expect Bumitama Agri to hit higher 4Q production qoq and deliver the highest production growth among companies under our coverage. Thus, Bumitama Agri is likely to outperform peers in 4Q17. 
  • Maintain MARKET WEIGHT.



WHAT’S NEW


3Q17 results wrap-up. 

  • Bumitama’s (BAL), Golden Agri’s (GGR) and Wilmar International’s (WIL) 3Q17 results were in line, while 3Q17 performance of First Resources (FR) below expectations mainly due to a higher effective tax rate. FR’s operating performance was within expectations. GGR registered the highest earnings improvement qoq in 3Q17 on the back of higher FFB production and a better CPO ASP.
  • All the companies registered significant improvement in yoy earnings for 9M17 on the back of higher FFB production and better CPO ASPs.


Key developments to watch out for in 3Q17: 

  • FFB production recovery pattern subject to rainfall pattern. We gather that Dharma Satya Nusantara (DSNG) and Bumitama (BAL) registered lower FFB production qoq. This could have been due to the high base in 2Q17. 
  • To recap, DSN and BAL were the few plantation companies that recorded qoq increases in FFB production in 2Q17. The production recovery pattern was abnormal, possibly due to the uneven rainfall pattern in different regions. Note that a majority of DSN’s and BAL’s estates were in Central and East Kalimantan.

Key developments to watch out for in 4Q17: Bumitama (BAL) to report higher FFB production qoq. 

  • Bumitama (BAL) maintained it FFB production growth guidance of 25% yoy for 2017. This suggests that 4Q17 production is expected to come in higher qoq, but lower yoy. Moreover, we understand that most of the fertilizer costs were booked in 9M17. Thus, BAL is likely to report better qoq earnings in 4Q17 and outperform peers.
  • Most companies likely to report flat qoq FFB production for 4Q17 in contrast to earlier expectations of strong peak production in 4Q17. For a yoy comparison, FFB production is likely to be lower as:
    1. the production recovery is slowing down especially in central and south Sumatra; and
    2. the record-high production in 4Q16 was mainly due to an abnormal production pattern caused by the lagged impact of the severe drought in 2015 which pushed production forward to 4Q.

FR and GGR revised down FFB production guidance. 

  • During the recent 3Q17 results analyst briefing, both First Resources (FR) and Golden Agri’s (GGR) revised their FFB production growth guidance downwards to 10-15% yoy from 15-20% yoy for 2017 due to the expected slower production recovery in 4Q17 as mentioned above.


ACTION 


Maintain MARKET WEIGHT. 

  • We maintain our longer-term view that there will be significant CPO price weakness going into 2018, as palm oil is likely to be in oversupply by mid-18. Moreover, the ample soybean supply in the market is likely to pressure soybean prices, in turn capping palm oil prices. 
  • We have HOLD calls on First Resources and Golden Agri as we reckon that current prices have already factored in the higher production and earnings expected for 2H17.
  • However, we have BUY calls on Bumitama Agri and Wilmar. We like BAL as its young tree age profile, which spells strong production, will partly offset the CPO price weakness going into 2018. Meanwhile, we are positive on Wilmar’s outlook on the back of the expected strong performance from the oilseeds and grains division.


ESSENTIALS


Biodiesel delivery back on track but sees lower margins. 

  • We understand that biodiesel take-up rate has normalised since Jun 17. Biodiesel subsidy has been reduced to a pricing formula of CPO base price + US$100/tonne from CPO base price + US$125/tonne. We gather that Wilmar and FR still managed to register low-single-digit net margins, but BAL recorded a small loss post the subsidy reduction.
  • Current firm CPO prices factor in low inventories and potential crop losses from heavy rainfall. The inventory build-up cycle for 2017 is likely to have concluded and Nov and Dec 17 should see a flattish trend or downtrend as production enters the low season.
  • We believe current CPO prices have factored in the high rainfall and flooding concerns on key planting states in Malaysia, ie Sabah, Pahang and Sarawak. Based on channel checks, there has been an impact from the high rainfall but the crop losses are not out of norm. Thus, there could be a downside risk to CPO prices if the weather turns out to be better later. 
  • We maintain our view that current high CPO prices would be short-lived as production is likely to increase significantly from Apr-May 18 onwards, while incremental demand would not be sufficient to absorb additional supply. Also, most of the plantation companies are unlikely to benefit from the current high prices as they may have locked in the contracts early this year at lower prices.

Refinery and processing margins continue to improve in 4Q17. 

  • 3Q17 refining margins were better qoq as the forward pricing curve has flattened, leading to better processing margins. 
  • We are expecting refinery margins to continue to improve in 4Q17, but the improvements are likely to only be marginal as the supply of raw materials is still relatively tight. This is positive to Wilmar, Golden Agri, and First Resources’ downstream businesses.


ASSUMPTION CHANGES 

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


SECTOR CATALYSTS 

  • Higher-than-expected rainfall that affects harvesting and transporting activity.
  • Worse-than-expected labour shortage.


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/ 2017-11-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.100 Same 4.100
BUY Maintain BUY 1.030 Same 1.030
HOLD Maintain HOLD 0.340 Same 0.340
HOLD Maintain HOLD 1.950 Same 1.950



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