Regional Plantations - Maybank Kim Eng 2020-03-25: Operations At 3 Districts In Sabah Affected By COVID-19

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Regional Plantations - Operations At 3 Districts In Sabah Affected By COVID-19

Earnings impact are likely to be immaterial for now

7-day suspension of operation in Sabah

  • According to Reuters news, Malaysia’s largest palm producing state Sabah, says it will temporarily suspend palm operations in three districts after seven plantation workers tested positive for the coronavirus. All oil palm plantations in Tawau, Lahad Datu, and Kinabatangan will suspend operations from March 25-31 (ie 7 days), while palm processing factories (ie mills) will suspend from March 27-31 (ie 5 days).

Sabah accounts for 6.6% of global PO output in 2019

  • The Sabah state, located in East Malaysia, produced about 5.0mt of CPO in 2019, which represents 26% of Malaysia’s total production and 6.6% of global palm oil (PO) output. The three districts in Sabah are major producing districts although we do not have their individual breakdowns. Sabah’s total oil palm planted area was 1.544m ha in 2019, or 26% of Malaysia’s total planted area.
  • A number of PLCs have operations in Sabah. They include Hap Seng Plantation (100% of group’s total oil palm planted area), IOI Corp (63%; HOLD), Boustead Plantation (53%; BUY), IJM Plantation (41%; NR), Genting Plantation (31%; SELL), FGV Holdings (31%; NR), KL Kepong (17%; BUY), THP MK (15%; BUY), TSH Resources (15%; BUY), and Sime Darby Plantation (8%; HOLD) by our estimates.
  • Companies under our coverage that do not have a presence in Sabah include Sarawak Oil Palm (BUY), and Ta Ann (BUY). At the point of publication, KL Kepong and Genting Plantation responded by saying that the affected areas represent 10% and 16% of group’s planted area.
  • By our estimate, IOI Corp, Boustead Plantation and TH Plantation’s affected areas are 25%, 12% and 10% of group while IJM Plantation’s estates are located outside the affected districts.

Impact is likely immaterial for now unless prolonged

  • Mathematically, the 7-day suspension of the estate operations equates to 1.9% of potential output loss for 2020. As most companies have diversified exposures in other districts, states or countries, the impact is smaller as a group. Furthermore, March has traditionally been the second lowest output month since 2009, and harvesters can play catch up when harvesting activities resume on day 8.
  • In any case, share prices of most plantation stocks have been severely bashed down YTD due to COVID-19 fear and as such, we think the impact have been priced in. However, the greater concern is if the suspension extends beyond 7 days or extends to more areas in Malaysia (or even Indonesia). Should that happen, palm oil output will be further curtailed but this will likely be compensated by higher CPO price (ceteris paribus) given the present tight supply.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-25
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