Plantation – Singapore - UOB Kay Hian 2018-08-16: Anticipating A Better 3Q18 Performance


Plantation – Singapore - Anticipating A Better 3q18 Performance

  • 2Q18 results were strong. 3 out of 4 companies’ results were above expectations. The earnings surprise from Wilmar International and First Resources was mainly due to better-than-expected downstream margins, while the positive variance for Bumitama Agri was from higher external fruit intake and realised CPO ASP.
  • 3Q18 production is expected to continue to improve and is likely to peak in Sep-Oct 18. Increasing biodiesel consumption will be a key supportive factor to CPO prices.
  • Maintain MARKET WEIGHT.


2Q18 results wrap-up.

  • All companies under our coverage reported 2Q18 results which were above our expectations, with the exception of Golden Agri Resources (GGR) which posted lower-than-expected results. 
  • The earnings surprise from Wilmar International (WIL) and First Resources (FR) was mainly due to better-than-expected downstream margins, while the positive variance for Bumitama (BAL) was attributable to higher-than- expected external fruit intake and realised CPO ASP.

2Q18 results better q-o-q and y-o-y.

  • All companies under our coverage, except for Golden Agri Resources, reported better q-o-q and y-o-y results in 2Q18. This could have been due to higher CPO sales volumes offsetting the weakness in CPO prices. 
  • In contrast to peers, Golden Agri Resources registered weak results q-o-q and y-o-y in 2Q18, mainly due to weak margins of the downstream and oilseeds segments.

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FFB production improved q-o-q in 2Q18.

  • Most of the Indonesian plantation companies registered higher q-o-q FFB production in 2Q18 (by 7% to 91%), except for Tunas Baru Lamping (TBLA) and First Resources which reported flat FFB production q-o-q. This could have been due to the location of their estates which are mainly in Sumatra where production is usually higher in 1Q. 
  • The strong q-o-q FFB production was supported by improved FFB yields.

3Q18 FFB production is expected to continue to improve.

  • In recent briefings, companies under our coverage guided that their FFB production is likely to continue to increase q-o-q in 3Q18 which is a peak production period. FFB production ratio is expected to be at 45%:55% for 1H18:2H18 (vs 47%:53% in 1H17:2H17).
  • Peak production could come in Sep-Oct 18 or early-Nov 18. FFB production is expected to fall in Dec 18 due to a seasonally high rainfall period.

Companies with downstream exposure are expected to post better results.

  • We understand that the good palm refining margins seen in 2Q18 are expected to sustain into 2H18 on a higher downstream utilisation rate, better pricing power for refiners (due to oversupply of feedstock and constraint of storage capacities at mills), and higher biodiesel sales volumes supported by higher mandated blending volume in Indonesia and higher exports. 
  • However, this scenario is not applicable for Golden Agri Resources as there is still some leftover high- cost feedstock to be processed and sold in 3Q18.



  • Our view is that CPO prices could have bottomed and further downside risk is limited. However, we reckon this is still not the time to enter as there are no strong catalysts to lift CPO prices in the medium term. 
  • CPO prices are likely to trade sideways in the near term, while we await stronger re-rating catalysts, eg much stronger biodiesel demand or disappointing production.


CPO fund is sufficient to support the biodiesel programme.

  • Indonesia’s government is looking to extend the biodiesel subsidy to Perusahaan Listrik Negara (PLN) and trains, targeted to take effect in Sep 18. According to news reported by CNN Indonesia, President Joko Widodo will sign the Presidential Regulation regarding the use of biodiesel for non-Public Service Obligation (PSO) in the next few days. This extension of biodiesel usage could increase local biodiesel demand by 500,000-700,000 kl for Sep-Dec 18 and boost total domestic biodiesel demand to 4.0m kl for 2018.
  • The additional demand comes just in time to utilise some of the production as Indonesia’s CPO production is expected to continue to increase until Oct 18.

Biodiesel allocation period could change in 2019.

  • Currently, biodiesel contracts for the PSO segment are awarded half-yearly. Biodiesel contract awards might be changed to being awarded annually (from half yearly) in 2019. Thus, the next contract award could be in Jan- Dec 19. This new arrangement could benefit biodiesel producers as producers will have production visibility for a year and may have better planning in terms of securing feedstock at better pricing.

Possibility of abolish export levy of US$50/tonne.

  • Market rumors indicate that there is a possibility that the Indonesian government may abolish/amend the export levy of US$50/tonne. The export levy is meant to help subsidise the biodiesel programme so as to increase CPO demand and support CPO prices. With the increase of gasoil prices, the subsidy needed for biodiesel production is minimal now.
  • If the abolishment of export levy materialises, Indonesian CPO prices could track close to Malaysian CPO prices. In our opinion, this likely to be a temporary measure if it happens and chances of complete abolishment is slim.


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$530/tonne (-33%) 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$614/tonne.
  • We maintain our CPO price assumptions of RM2,400/tonne (or US$615/tonne at exchange rate of RM3.90/US$) and RM2,500/tonne (or US$641/tonne at exchange rate RM3.90/US$) for 2018 and 2019 respectively.


  • Higher-than-expected Indonesia biodiesel demand.
  • Worse-than-expected labour shortage.


  • Backtracking of biodiesel mandates in Indonesia and Malaysia.

Leow Huay Chuen UOB Kay Hian Research | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-16
SGX Stock Analyst Report BUY Maintain BUY 3.900 Same 3.900
SELL Maintain SELL 0.16 Same 0.16
BUY Maintain BUY 0.930 Same 0.930
HOLD Maintain HOLD 1.600 Same 1.600