Plantation – Singapore - UOB Kay Hian 2018-11-20: 3Q18 Results Review ~ Earnings Affected By Logistics Issue In Indonesia

Singapore Plantation Companies - UOB Kay Hian Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Plantation – Singapore - 3Q18 Results Review: Earnings Affected By Logistics Issue In Indonesia

  • Wilmar International and First Resources reported strong q-o-q and y-o-y results in 3Q18. However, earnings for Bumitama Agri and Golden Agri Resources were below expectations on lower sales volumes due to a logistics issue in Indonesia although production growth was in line.
  • 4Q18 FFB production is expected to be mixed, with higher q-o-q production expected in Kalimantan but flat or marginally lower in Sumatra. The high inventory is expected to boost sales in 4Q18 and 1Q19 as the logistics problem eases.
  • Maintain MARKET WEIGHT.



WHAT’S NEW


3Q18 results wrap-up.

  • The major issue in 3Q18 was the logistics problem in Indonesia which led to lower sales volumes. Production growth was within expectations but earnings were dragged by lower sales volumes, except for Wilmar International and First Resources (FR). Wilmar International has the advantage of operating its own vessels while First Resources benefitted from production being concentrated in Riau, Sumatra.
  • Although 3Q18 results were partly affected by lower selling prices, the lower ASP could see more impact on earnings in 4Q18.

FFB production up q-o-q and y-o-y.

  • All Indonesian plantation companies registered higher q-o-q and y-o-y FFB production in 3Q18. Tunas Baru Lamping (TBLA). registered a strong y-o-y FFB production growth of 23.7% y-o-y in 9M18, possibly due to its extremely strong production in 1Q18 on the back of a recovery in its FFB yield while has normalised in 2Q- 3Q18.
  • The severely dry weather in 2015-16 has led to an uneven recovery in FFB yields.

Mixed FFB production trends in 4Q18.

  • FFB production trends in 4Q18 could be mixed for companies. First Resources is expected to see flat or a marginal q-o-q decline. Management believed its production has peaked in 3Q18, in line with its historical trend.
  • On the other hand, Bumitama Agri and Golden Agri Resources expect production to continue to improve q-o-q in 4Q18. This could due to their different planted areas vs First Resources (mainly in Riau, Sumatra) and Bumitama Agri’s FFB production growth is supported by young mature areas which are mainly in Kalimantan.

Logistics issue in 3Q18 could boost BAL’s and GGR’s sales in 4Q18 and 1Q19.

  • Plantation companies in Indonesia, especially those that have high exposure outside of Sumatra, face difficulties in getting barges to deliver their CPO to buyers. The barges are mainly chartered by biodiesel producers to deliver the contracts all over Indonesia. This issue has not been resolved yet and worsened with the extremely high production in 3Q18. Inventory levels of Bumitama Agri and Golden Agri Resources were abnormally high as at end-Sep 18. As such, we expect both companies to see higher sales volumes in 4Q18 and 1Q19.
  • No plans to cut export levy on palm oil in the short term, said Indonesia’s Coordinating Minster of Economic Affairs.


ACTION


Maintain MARKET WEIGHT.

  • Our view is that CPO prices could have bottomed and further downside is limited. However, we reckon this is still not 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.


ESSENTIALS


Expect logistics problem to ease by end-18.

  • The Indonesian government might reduce biodiesel delivery points from 112 fuel oil terminals to 10-13 terminals to overcome the logistics issue. This might be announced soon and to take effect in Dec 18 or Jan 19.

Downstream sales volumes and margins expected to improve in 4Q18.

  • With the implementation of the B20 biodiesel mandate in Indonesia for both the PSO and non-PSO segments effective Sep 18, biodiesel production is expected to increase q-o-q in 4Q18. First Resources and Golden Agri Resources expect biodiesel sales volume to continue to improve in 4Q18.
  • Moreover, with high levels of feedstock available and low prices currently, downstream margins are likely to improve in 4Q18.

Fertiliser application mostly completed in 3Q18.

  • First Resources said its fertiliser application reached 80-90% as of 9M18, in line with the application trend in 9M17. Golden Agri Resources also guided that most of its fertiliser application was completed in 9M18. Production costs are expected to be lower in 4Q18. All in all, 4Q18 results are likely to be better.


ASSUMPTION CHANGES


Recent weakness in CPO prices due to high supply.

  • Hopefully, as production slows down and more domestic demand in Indonesia, prices should recover towards end-18. The increase in biodiesel demand is expected to support CPO prices. Thus, downside for CPO prices is not as high as in earlier this year. The average Dumai/Belawan CPO price ytd was US$582/tonne (as at 16 Nov 18), or US$422.50/tonne.
  • We maintain our CPO price assumptions of RM2,400/tonne (US$560/tonne) and RM2,500/tonne (US$600/tonne) for 2018 and 2019 respectively. We reckon that 2018 CPO ASP is expected to be around RM2,300, or 4.2% below our expectation, and the earnings impact for 2018 is likely to be at 1-6%. However, the urgency is for companies to sell more as storage space is running out.


SECTOR CATALYSTS

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


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.





Leow Huay Chuen UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-20
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 0.810 SAME 0.810
HOLD MAINTAIN HOLD 1.600 SAME 1.600
SELL MAINTAIN SELL 0.200 SAME 0.200



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