Plantation – Singapore - UOB Kay Hian 2019-05-24: 1Q19 Results Review: Earnings Likely To Have Bottomed For This Cycle

Plantation – Singapore - 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 - 1Q19 Results Review: Earnings Likely To Have Bottomed For This Cycle

  • 1Q19 saw another weak quarter of earnings for plantation companies largely due to subdued palm and palm kernel oil prices. Production patterns of companies vary depending on estate location and age profile.
  • Companies with older palm trees reported weaker y-o-y production, but most companies are guiding for higher FBB production for the rest of 2019, especially 2H19. Thus, 1Q19 earnings would likely have been the bottom for this year.
  • We expect stronger earnings in 2H19, driven by better production and higher ASP.
  • Maintain MARKET WEIGHT.



WHAT’S NEW


1Q19 results wrap-up.

  • The weak 1Q19 earnings were within our expectations, driven by lower ASP and higher operating cost. However, BUMITAMA AGRI LTD. (SGX:P8Z)’s results came in below expectations, mainly due unexpectedly high selling and financing costs. Its expenses (mainly logistics cost) should normalise by 2Q19.
  • Earnings of FIRST RESOURCES LIMITED (SGX:EB5) and GOLDEN AGRI-RESOURCES LTD (SGX:E5H) were within our expectations. First Resources’s revenue grew 10.4% y-o-y, boosted by higher sales volumes but partially offset by lower ASP which contributed to the decline in margins.
  • WILMAR INTERNATIONAL LIMITED (SGX:F34)’s earnings were above our expectations with a positive surprise from the tropical oils and sugar segments despite low soybean crushing and commodity prices.

Unusual FFB production in 1Q19 – down qoq but higher yoy.

  • Based on data from companies’ announcements, 1Q19 FFB production of the 11 companies (see list in attached PDF report) that we monitor rose 4.0% y-o-y but fell 18.8% q-o-q.
  • Among them, only Wilmar and First Resources had lower y-o-y FFB production as both companies have more oil palm trees that are above 15 years old, and their FFB yields are not expected to recover back to their prime yield prior to the 2015 El Nino. Younger oil palm trees (largely in Kalimantan) are expected to continue to show recovery in FFB yields.

Better selling prices and higher production to support higher earnings in the next three quarters.

  • Although CPO prices are still relatively weak at this point, we believe prices should recover gradually and close higher for the year. Coupled with higher production over the next three quarters as guided by companies, 2H19 earnings should be much higher than in 1H19.
  • During the briefings, companies mentioned that due to the drastic weather changes since the 2015 El Nino, companies are looking at higher-than-usual production in 2H19. Most are guiding for the production ratio in 1H:2H at 40-42:58-60 vs the norm of 45:55.

Not much new planting and replanting in 1Q19.

  • Since 2015, companies are cutting back in new planting and some are focusing on replanting older-age area with higher yielding trees. The annual new planting targets range from 1,500ha to 2,000ha for most of the companies.
  • For 1Q19, Bumitama Agri planted only about 29ha. Golden Agri-Resources targets to replant 15,000ha for 2019. In 1Q19, Golden Agri-Resources replanted 2,200ha with newer-generation higher-yielding seeds to sustain long-term production growth.


ACTION


Maintain MARKET WEIGHT.

  • We maintain our view that CPO prices in 2019 will be stronger on the back of:
    1. lower production,
    2. strong demand for biodiesel,
    3. lower soybean crushing, and
    4. lower rapeseed and canola production.
  • Our CPO price assumption for 2019 is RM2,350/tonne.


SSENTIALS


Downstream to continue to perform well in 2Q19.

  • Most of the companies achieved high downstream margins expect for First Resources due to the delay in invoice recognition in 1Q19. With low feedstock prices, we reckon downstream operations of the companies would continue to perform well in 2Q19, in line with management guidance.

Potential increase in biodiesel capacity if Indonesia implements B30.

  • The active biodiesel players might increase their biodiesel capacity if the Indonesian government increases the biodiesel mandate to B30. Most of their biodiesel plants are running at almost full capacity currently even with B20 biodiesel mandate.
  • The market is expecting the Indonesian government to implement the B30 biodiesel mandate by early-Jan 20.


ASSUMPTION CHANGES

  • No change to our CPO price assumptions of RM2,350/tonne for 2019 and RM2,400/tonne for 2020. We foresee higher CPO prices in 2H19 as inventories are drawn down on lower production growth expected for 2019.


SECTOR CATALYSTS


Higher-than-expected biodiesel usage.

  • 2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia. The Indonesian government may increase the biodiesel mandate to B30 blending (from B20) in early-20. Some Indonesian stakeholders from private and state institutions will kick off a maiden road test for B30 biodiesel usage in their vehicles end-May.
  • If the mandate increases to B30 in Indonesia, blending volume is likely to increase by an additional 3m kl per year (2019F: 6.2m kl). Based on Indonesia Biofuels Producer Association (APROBI) data, Jan-Feb 19 domestic biodiesel usage was 1.38m kl and exports were about 1.04m kl.


RISKS

  • Higher-than-expected CPO production.
  • Weakening crude oil prices.
  • Changes in government policies





Leow Huay Chuen UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-24
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 0.810 SAME 0.810
HOLD MAINTAIN HOLD 1.700 SAME 1.700
SELL MAINTAIN SELL 0.210 SAME 0.210



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