Plantation - Expects lacklustre 3QCY12 earnings

Out of the eight planters under our coverage that will be releasing their quarterly results in November, we expect five of them to report earnings which will trail the consensus estimates. This will likely be due to the lower-than-expected actual average CPO price* in 3QCY12 of RM2851/mt (-8% YoY) as a result of the weaker demand from major CPO consumers such as China and Pakistan. We believe the consensus may have been too optimistic on its estimate of the average CY2012 CPO price at RM3050/mt. As YTD average CPO price achieved was only RM3010/mt, CPO needs to register an average price of RM3250 in Nov and Dec to meet the consensus estimate. With current CPO prices hovering around RM2300-RM2400, we think the above scenario is unlikely. Hence, we believe that consensus may cut their earnings significantly post-3QCY12 after factoring in lower actual CPO prices. The El Nino threat has also become less severe as the SOI reading is now neutral at +2.2 (as of 21 Oct). We are maintaining our CY12-CY13 average CPO prices of RM2,975-RM3,000, which is below the consensus average of RM3050-RM3025. We continue to like young planters and maintain OUTPERFORM calls on TSH (TP: RM2.70) and UMCCA (TP: RM7.65) for their double-digit FFB growth prospects. We maintain MARKET PERFORM calls  on SIME (TP: RM9.80), IOICORP (TP: RM5.20), KLK (TP: RM22.30), PPB (TP: RM14.60), GENP (TP: RM9.00) and IJMP (TP: RM3.35). Our UNDERPERFORM call on TAANN is retained (TP: RM3.40) due to its timber division weakness.

3QCY12 results to mark another uninspiring quarter. We expect five out of the eight planters’ upcoming 3Q results in November under our coverage to miss their consensus estimates. This will likely be due to a lower-than-expected actual average CPO price in 3QCY12 of RM2851/mt (-8% YoY) as a result of the weaker demand from major CPO consumers such as China and Pakistan. In addition, CPO production volume was flat with Malaysia’s 3QCY12 CPO output at 5.36m mt (+1% YoY) as productions in Jul-12 and Aug-12 were still affected by the lag effect from the El Nino which occurred 2 years ago. Overall, the lower YoY earnings should keep plantation stocks prices upside limited.

QoQ earnings improvements are expected in 3QCY12, but this is not good enough. We gather that Malaysia’s 3QCY12 CPO production has jumped significantly by 30% QoQ to 5.36m mt. This should be more than enough to offset the lower CPO prices, which have declined by 11% to RM2851/mt. The better production was caused by the seasonal trend factor coupled with a recovery from the tree stress effect. CPO prices have weakened in 3QCY12 as a result of the surge in inventories from 1.70m mt in Jun-12 to a record high of 2.48m mt in Sep-12. Despite likely better QoQ earnings, we think that the 3QCY12 results will still fall behind market estimates due to the lower than expected CPO prices.

Consensus may have been too optimistic on CPO prices. We reckon that CY2012 CPO prices will likely end below RM3000/mt at an expected RM2975/mt. As YTD average CPO price achieved was only RM3010/mt, CPO prices need to register on average RM3250 in Nov and Dec to meet consensus estimate. With current CPO prices of only RM2300-RM2400, we believe such scenario is unlikely. Hence, we think consensus may cut their earnings significantly post-3QCY12 after factoring in the lower CPO prices estimate. Our CY2012-CY2013 CPO price estimate of RM2975-RM2960 is below the consensus average of RM3050-RM3025.

Less concerned on El Nino threat. The latest SOI reading of +2.2 (as of 21 Oct) suggests that a strong El Nino event is now unlikely. SOI readings ranging from negative 8 to +8 indicate neutral ENSO levels (no El Nino or La Nina). The absence of weather disruption means there will be little excitement on CPO prices on this front.

Stay with young planters like TSH and UMCCA.  These players boast average tree age profiles of just 6.2 and 7.6 years old respectively, the youngest among pure planters under our coverage. Due to the double-digit FFB growth prospect for TSH and UMCCA, we expect their earnings to be more resilient than other planters.  

Source: Kenanga