Plantation Singapore 2Q19 Results Review - UOB Kay Hian 2019-08-20: Better 2H19 Ahead

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 2Q19 Results Review - Better 2H19 Ahead

  • The disappointing 2Q19 results were mainly due to lower-than-expected production. We reckon that the 2H19’s production growth rate will come in slower compared to that in the previous years. Companies had also revised their production growth guidance downwards.
  • 2H19 would be better, supported by higher production and CPO selling prices.
  • Maintain MARKET WEIGHT.



WHAT’S NEW


2Q19 disappointment mainly came from lower-than-expected production.

  • The yield stress after two consecutive years of good production was underestimated, and led to the 2Q19 results disappointment. In addition, ASP for 2Q19 dipped lower y-o-y and q-o-q and hit a two-quarter low. A positive from 2Q19 was good downstream margins, where all three companies – WILMAR INTERNATIONAL (SGX:F34), GOLDEN AGRI-RESOURCES (SGX:E5H) and FIRST RESOURCES (SGX:EB5) were able to sustain unusually good margins for three consecutive quarters.

2019 production growth forecast revised downwards.

  • Post the disappointing 1H19 production, companies have revised down their production growth guidance for 2019. BUMITAMA AGRI (SGX:P8Z)’s revised production growth forecast at 5-8% for 2019 is still the highest vs First Resources’s 0-5% and Golden Agri-Resources’ 0% production growth, thanks to its younger age profile. We are not surprised with the downward revisions; we had highlighted this risk of lower production in our sector reported dated 29 Jul 19.
  • We attribute the lower production to the strong production recovery in 2017 and 2018 and impact from patches of dryness and high temperatures in 2H18.

High production in 2H19 comes in time with the better selling prices.

  • CPO prices are normally under pressure in the high production season. However, we forecast that the CPO prices will increase despite the higher production in 2H19 on:
    1. incremental production in 2H19 unlikely to be much higher than that in 1H19,
    2. strong demand supported by festive seasons and wide discount to soybean oil, and
    3. lower inventory levels.
  • In Malaysia, palm oil inventory was at 3.22m tonnes as at end-Dec 18 and declined to 2.4m tonnes by end-Jun 19. As for end-Dec 19, the Malaysia Palm Oil Board (MPOB) has estimated palm oil inventory will be at only 2.4m tonnes. This is positive to CPO prices.

Potential increase in biodiesel capacity if Indonesia implements B30.

  • 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.


ACTION

  • Maintain MARKET WEIGHT on the sector as CPO prices should have hit the bottom and downside risk is cushioned by improving soybean prices and high crude oil prices. We also expect the palm oil oversupply to ease leading up to 4Q19-2020.
  • CPO prices have started to recover in August, up 14% from the recent low at RM1,865 in Jul 19.
  • We maintain BUY on Bumitama Agri and Wilmar International.


ESSENTIALS


2Q19 results wrap-up.

  • 2Q19 results were below our expectation mainly due to lower-than-expected production. Earnings of Bumitama Agri and Golden Agri-Resources came in below our expectations, mainly due to lower CPO prices and FFB production. However, Golden Agri-Resources’ downstream exposure, especially in biodiesel, had partially cushioned the loss impact from the weak performance of upstream operations.
  • First Resources’ earnings were within our expectation, with its downstream exposure having partially offset the impact from weak selling prices.
  • Wilmar International’s earnings were below our expectations with lower-than-expected PBT margins from the oilseeds & grains and sugar segments.

Downstream to continue to perform well in 2Q19.

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


ASSUMPTION CHANGES


Maintain CPO price assumption.

  • We maintain our CPO price assumptions at RM2,100/tonne (US$525) and RM2,250/tonne (US$562.50) for 2019-20 respectively.


SECTOR CATALYSTS


Higher-than-expected biodiesel usage.

  • 2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia. 7M19 biodiesel consumption in Indonesia was at 3.49m kl, 56% of the full-year target of 6.2m kl. Indonesia is undertaking a road test on the B30 mandate which is expected to be implemented by early-20. According to the Deputy Energy and Mineral Resources Minister, the road test will run until Oct 19.
  • The B30 mandate is likely to increase blending volume by 3m kl annually (2019F: 6.2m kl).


RISKS

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





Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-20
SGX Stock Analyst Report BUY MAINTAIN BUY 4.500 SAME 4.500
BUY MAINTAIN BUY 0.73 SAME 0.73
HOLD MAINTAIN HOLD 1.600 SAME 1.600
SELL MAINTAIN SELL 0.16 SAME 0.16



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