Plantation Stocks - UOB Kay Hian 2018-05-22: 1Q18 Results Review ~ Production And Sales Volume Below Expectations

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Plantation Stocks WILMAR INTERNATIONAL LIMITED SGX: F34 BUMITAMA AGRI LTD. SGX: P8Z FIRST RESOURCES LIMITED SGX: EB5 GOLDEN AGRI-RESOURCES LTD SGX: E5H

Plantation – Singapore - 1Q18 Results Review ~ Production And Sales Volume Below Expectations

• 1Q18 results are disappointing. All the companies under our coverage, except Bumitama Agri, reported weaker-than-expected 1Q18 results. This was mainly due to either lower-than- expected production in 1Q18 or lower sales volumes (volumes to be delivered in 2Q18 instead).
• Production and sales volumes are likely to play catch-up in the subsequent quarters but overall sector performance will still be dragged down by a weaker CPO ASP and hence lead to lower earnings y-o-y.
• Maintain MARKET WEIGHT.

WHAT’S NEW

• 1Q18 results wrap-up. All the companies under our coverage reported 1Q18 results which were below our expectations, with the exception of Bumitama Agri (BAL) which posted in-line results. The earnings disappointment was mainly due to either lower-than-expected 1Q18 production or lower sales volumes (volumes to be delivered in 2Q18 instead). 1Q18 earnings of all Singapore-listed plantation companies under our coverage were weaker q-o-q for 1Q18 due to seasonally lower CPO production and lower CPO ASPs, while the weaker y-o-y earnings were due to lower CPO ASPs.
• FFB production dropped qoq in 1Q18 on seasonality. Most of the plantation companies under our coverage registered declines in FFB production in 1Q18 (by -2% to -35%) on seasonality, except for Bumitama Agri and Wilmar International (WIL) which reported q-o-q increases in FFB production on the back of higher FFB yield q-o-q.
• Weaker FFB production yoy due to high base in 1Q17. FFB production of 13 plantation companies with estates in Indonesia dropped 2.9% y-o-y. Most of the plantation companies registered declines in FFB production in 1Q18 due to the high base in 1Q17. However, Tunas Baru Lampung (TBLA), Bumitama Agri, First Resources (FR), Wilmar International and London Sumatra (LSIP) reported y-o-y increases in FFB production. The key reasons that led to Bumitama Agri’s and First Resources’s FFB y-o-y production increases were improved FFB yields supported by new areas coming into maturity. TBLA, Wilmar International and LSIP reported higher FFB production on improved FFB yields.
• 2Q17 FFB production could increase marginally q-o-q. In recent briefings, Singapore- listed plantation companies under our coverage guided that their FFB production is likely to increase marginally q-o-q on the back of a yield recovery. We understand that the Ramadhan and Lebaran festivities could affect harvesting activity as fewer workers are available during the festive holiday season. FFB production ratio is expected to be at 40-45%:55-60% for 1H18:2H18 (vs 47%:53% in 1H17:2H17). All in all, we expect a stronger FFB production in 2H18.
• Expect stable CPO prices in 2Q18. Dumai/Belawan CPO prices declined from the high of US$793/tonne in Jan 17 to US$625/tonne (-21%) currently. Average Dumai/Belawan CPO price for 1 Apr 18 to 18 May 18 was at US$634/tonne vs 1Q18’s average of US$645/tonne and 2Q17’s average of US$676/tonne. With CPO prices weakening, high crude oil prices and expected increase in biodiesel demand, we expect downside risk for CPO prices will not be as high as that earlier this year. We expect CPO prices to trade in the range of US$600- 650/tonne in 2Q18.

ACTION

• Maintain MARKET WEIGHT. CPO’s price outlook is not as bearish as it was earlier this year, but we reckon this is still not a good time to enter due to potential further downside in share prices in view of potential weak earnings y-o-y as CPO prices weaken y-o-y.

ESSENTIALS

• Higher allocations for biodiesel volume secured. All the plantation companies under our coverage secured higher biodiesel allocations for the period of May-Oct 18. The allocations to Wilmar International, First Resources and Golden Agri-Resources (GGR) are higher hoh, up 4-10% hoh compared with the previous contract for Nov 17-Apr 18. 
• Meanwhile, there is no allocation for Bumitama Agri as it has plans to close down its biodiesel plant given that its biodiesel segment incurred negative margins as a result of the biodiesel subsidy having been reduced to a pricing formula of CPO base price + US$100/tonne (previously CPO base price + US$125/tonne) and utilisation rate declining due to lower awarded volumes.
• Biodiesel exports to increase. First Resources and Golden Agri-Resources indicated that Indonesia’s biodiesel exports could increase after the EU eliminates anti-dumping duties on biodiesel. Any increase in biodiesel imports from the EU could benefit First Resources and Golden Agri-Resources. Do note that currently, First Resources’s and Golden Agri-Resources’s biodiesel production caters to only domestic biodiesel production and not export demand.

ASSUMPTION CHANGES

• Downside risk not as high as that in early-18. Dumai/Belawan CPO prices declined from the high of US$793/tonne in Jan 17 to US$625/tonne (-21%) currently. With CPO prices weakening, high crude oil prices and the expected increase in biodiesel demand, we expect downside risk for CPO prices is not as high as that earlier this year. Average Dumai/Belawan CPO price ytd is at US$641/tonne.
• We maintain our CPO price assumptions of RM2,400/tonne for 2018 (or US$615/tonne at RM3.90/US$) and RM2,500/tonne for 2019 (or US$641/tonne at RM3.90/US$).

SECTOR CATALYSTS

• Higher-than-expected Indonesia biodiesel demand.
• 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 | https://research.uobkayhian.com/ 2018-05-22

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