Plantation Singapore - UOB Kay Hian 2019-11-21: 3Q19 Results Review ~ Earnings Turnaround, But Lower Than Expected

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

Plantation Singapore - 3Q19 Results Review: Earnings Turnaround, But Lower Than Expected

• Most companies under our coverage saw a turnaround in 3Q19 earnings on the back of better ASP and lower cost, except for Golden Agri-Resources. However, 3Q19 production came in below expectation, and the companies have revised their production guidance for 2019.
• We reckon that 4Q19 earnings would be higher on the back of the CPO price recovery in late Aug-19. The current high CPO spot prices will only be reflected in companies’ earnings in 2020.
• Maintain OVERWEIGHT.

WHAT’S NEW

3Q19 results wrap-up.

• The most notable points from the 3Q19 results season are:
  1. most companies saw earnings turnaround on slightly better ASP and lower cost with the exception of GOLDEN AGRI-RESOURCES (SGX:E5H),
  2. total production for 3Q19 was below expectation, and is attributable to the drier-than-expected weather, and
  3. 2019 production growth has been revised down again.
• BUMITAMA AGRI (SGX:P8Z)’s results came in below expectation mainly due to lower-than-expected nucleus production, while Golden Agri-Resources’s results were also below expectation on the back of lower FFB production and higher production cost.

2019 production growth forecast revised downwards.

• Post the disappointing 3Q19 production, companies have revised down their production growth guidance for 2019. Overall, they have guided for flat or a slight y-o-y decrease in FFB production growth for 2019 (please refer to the FFB production growth guidance table in the side bar). Golden Agri-Resources is the only company that has guided for negative growth at -3% y-o-y for both 2019 and 2020.
• We reckon that the revision in production growth is mainly due to:
  1. lack of fertiliser application since 2H18,
  2. drought in 1Q19 and 3Q19, and
  3. hazy conditions in Sep 19.

B30 biodiesel mandate: Ready to go.

• The Indonesian Ministry of Energy and Mineral Resources had officially announced the biodiesel allocation of 9.6m kilolitres (kl) for the B30 biodiesel mandate programme on Oct 19. Further to that, they have also approved an additional allocation of 72,000 kl unblended biodiesel for B30 trial. Once the B30 biodiesel programme kick-starts in 2020, most of the Indonesian biodiesel will used for domestic consumption.
• FIRST RESOURCES (SGX:EB5) and Golden Agri-Resources had guided that they no longer export their biodiesel to EU and China respectively. Golden Agri-Resources will start to expand its Kalimantan biodiesel plant from 300,000kl/p.a. to 600,000kl/p.a. by early next year, which will take about one year to complete. Most of Indonesia’s biodiesel plants will run at full capacity in 2020.

Higher 4Q19 and 2020 earnings.

• With the higher CPO prices since late Aug-19, we reckon that the ASPs for 4Q19 would be higher than 3Q19. Currently, CPO spot prices are trading at RM2,400-2,500/tonne, and we expect this to only be reflected in 2020 earnings.

SUMMARY OF 3Q19 CORE NET PROFIT

	3Q19	q-o-q % chg	y-o-y % chg	9M19	y-o-y % chg	Vs Expectation
WILMAR INTERNATIONAL (SGX:F34)	US$419m	>100	(3.2)	US$846m	(12.6)	Within
BUMITAMA AGRI (SGX:P8Z)	Rp207b	82.4	(30.4)	Rp347b	(62.6)	Below
FIRST RESOURCES (SGX:EB5)	US$27.8m	60.6	(23.1)	US$56.8m	(39.4)	Slightly Below
GOLDEN AGRI-RESOURCES (SGX:E5H)	-US$21m	(57.6)	n.a.	-US$85m	n.a.	Below

ACTION

Maintain OVERWEIGHT.

• The recent palm oil price recovery is likely to sustain into 2020 as the shortage of supply may be more severe than expected due to the severe dry weather during Jul-Oct 19 as well as the reduction in fertiliser application since 2H18.
• We re-iterate our BUY on First Resources and Bumitama Agri for:
  1. their high earnings leverage to CPO price, and
  2. they will still see production growth (albeit small) for 2020 supported by younger age profile.

Buy on Willmar.

• We also like WILMAR INTERNATIONAL (SGX:F34) with its strong market positioning and branding in China and its stable earnings performance. Besides, the listing of its China operation, Yihai Kerry Arawan (YKA) would be a catalyst, and we expect Wilmar to declare a special dividend.

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.

RISKS

• Weakening crude oil prices. CPO prices and crude oil prices are now at parity. Biofuel demand currently makes up close to 30% of global palm oil consumption. Thus, weaker crude oil prices could put this demand at risk.
• Higher-than-expected CPO production.
• Changes in government policies.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-21

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