The recently announced 3QCY12 results for planters under our coverage were generally uninspiring
with 56% of planters under our coverage reporting earnings below the consensus
estimate. This was mainly caused by the lower than expected selling prices for
CPO. Looking forward, we foresee a massive “earnings cliff” in the coming
earnings reporting season (Feb-13) as 4QCY12 earnings are poised to tumble at
least 30% YoY and 20% QoQ. In the near term, we expect Nov-12 inventory number
to stay stubbornly high at 2.49m mt and this should keep the CPO price upside
limited. Lastly, the high CPO discount against soybean oil may linger on for
another 3 months as the northern hemisphere is entering its winter season soon.
As palm oil tends to solidify in cold
temperatures, consumers may prefer to use rapeseed oil and soybean oil
despite its higher prices against palm oil. Downgrade Plantation sector to
UNDERWEIGHT (from NEUTRAL) with our average CPO price estimates for CY12-13E
reduced to RM2,900-RM2,850 per mt (from RM2975-RM3000 per mt previously).
Downgrade TSH (New TP: RM2.22; Old TP: RM2.48) and UMCCA (New TP: RM7.00; Old
TP: RM7.65) to MARKET PERFORM ratings
but are maintaining our existing MARKET PERFORM ratings on SIME (TP: RM9.00),
FGVH (TP: RM4.40) and PPB (TP: RM14.38). Maintain NDERPERFORM ratings on
IOICORP (New TP: RM4.40; Old TP: RM4.70), KLK (TP: RM20.00), GENP (TP: RM8.30),
IJMP (TP: RM2.70) and TAANN (New TP: RM2.90; Old TP: RM3.40).
3QCY12 results below
the consensus expectations. Out of the nine planters under our coverage,
five of them miss their consensus earnings estimates in 3QCY12 with the
remaining in line with none performing above expectations. Companies such as
IOICORP, FGVH, GENP, IJMP and TSH earnings were below expectation due to the
lower than expected selling prices for CPO while others suffered from a longer
than expected tree stress.
Watch out for 4QCY12
earnings cliff. Earnings are poised to tumble at least 30% YoY and 20% QoQ.
The significantly lower YoY earnings should be driven by expected lower average
spot CPO prices of ~25% to ~RM2250/mt in 4QCY12 (from RM3014/mt in 4QCY11). QoQ,
we think earnings could decline more than 20% as CPO price is expected to tumble
by ~21% to ~RM2250/mt in 4QCY12 (from RM2851/mt in 3QCY12). As CPO prices have
plunged to below RM2,500/mt in early Oct-12 and stay at that low level for an
extended period, planters 4QCY12 earnings will likely to fall by at least the
same magnitude as CPO prices tend to command very significant impact to
planters earnings historically. As we think consensus have yet to reflect this
in the earnings forecast, another round of deeper earnings cut is likely.
Nov-12 CPO inventory
could stay near record high level at 2.49m mt. Despite a slight decline of
1% MoM for inventory, it remains significantly higher by 20% YoY. On the demand
side, we have assumed CPO exports to increase by 5% MoM to 1.85m mt in Nov-12
as China trader is expected to stock up refined palm oil ahead of tighter
regulations on edible oil imports from 2013 onwards. On the supply side, we
have assumed 6% MoM decline of CPO production to 1.82m mt which is in line with
historical seasonal FFB volume decline MoM in Nov. Tentatively, our forecast
shows that inventory should remain close to its historical high level of 2.51m
mt and keep CPO prices upside limited below RM2500 in the near term. Note that
MPOB is expected to release its inventory data on 10-Nov-2012 (~1 week from
now).
2012-2013 CPO price
assumptions cut by 3%-5% to RM2,900-RM2,850. Our previous assumption was RM2,975 for 2012
and RM3,000 for 2013. In our CPO price forecast model using the
multi-regression method, we have now assumed higher ending inventory of 2.48m-2.38m
mt (from 2.28m-2.05m mt) for 2012-2013
with all other variables remained unchanged. As a result, we slash our
FY12-14 earnings forecast for all planters under our coverage by up to 14%
after incorporating our new CPO price forecasts.
Downgrade to
UNDERWEIGHT. We believe that the threat of earnings falling “off the cliff”
during the next earnings season result in Feb-13 is very real. As earnings are
poised to fall at least 20% in 4QCY12 both YoY and QoQ, there is still room for
plantation stocks’ share prices to drop further. In addition, the stubbornly
high inventory at more than 2.0m mt may continue throughout 1Q13 and keep the
CPO price upside limited below RM3000/mt.
56% of planters’
earnings miss consensus estimate. Out of the 9 planters under our coverage,
only 4 manage to meet consensus estimates in 3QCY12 reported earnings. None of
these planters beat consensus estimate and there are as many as 5 companies
(IOICORP, FGVH, GENP, IJMP and TSH) earnings which trail consensus estimate in
3QCY12. We believe that this is caused by lower than expected selling prices
for CPO and weaker than expected FFB production volume. For FGVH and IOICORP, we
believe the impact of tree stress has been greater due to its maturing estate
with estimated average age profile of 16.5 and 13.7 years old respectively. For
IJMP and TSH, we believe its FFB yield has been caused by lower FFB production
from Sabah which were hardest hit by tree stress due to prolonged dry period
about 2 years ago.
Only PPB registered
higher earnings YoY in 3QCY12. PPB’s 3Q12 core net profit improved 9% to
RM249m in line with goof set of result from Wilmar which has benefited from
turnaround to profitability in its soybean crushing division in China. Other planters
register lower earnings YoY with SIME register the lowest losses thanks to
better contributions from non-plantation divisions. Meanwhile, TSH earnings
decline the most as it was affected by lower FFB production of 7% YoY, lower
CPO prices of RM2,851/mt (-8% YoY based on MPOB prices) while cost of
production may have increased at least 15% due to its young age profile in
Kalimantan.
Source: Kenanga
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