This article first appeared in The Edge Financial Daily on April 25, 2018

Plantation sector
Maintain underweight: We expect all companies under our coverage to register weaker quarter-on-quarter (q-o-q) results on lower fresh fruit bunch (FFB) production and crude palm oil (CPO) average selling price (ASP) in first quarter of 2018 (1Q18). Year-on-year (y-o-y) performances are likely to have been dragged down by the plunge in CPO ASP despite the FFB production recovery. Companies with downstream operations could report weaker results due to smaller refining margins. The potentially weaker 1Q18 results and the bearish outlook could hamper share price performances in the medium term. Maintain “underweight”.

Sabah-based companies such as Genting Plantations and IOI Corp may see flat or higher y-o-y results in 1Q18 due to the sharp decline in CPO ASP being offset by stronger FFB production recovery.

We expect refining margins in 1Q18 to have fallen q-o-q and y-o-y. Average refining margins were at -RM25 per tonne in 1Q18 versus RM22 per tonne in 4Q17 and RM19 per tonne in 1Q17. For 1Q18, Indonesia-based refiners are expected to see better refining margins as compared with Malaysia peers. Malaysia-based refiners are facing difficulties in sourcing for CPO after the Malaysian government suspended the CPO export duty for three months (might need to pay a premium to source for feedstock), and they are also facing pressure from Indonesia peers who are getting cheaper CPO supplies. Within our coverage, Sime Darby Plantation and Kuala Lumpur Kepong have exposure to downstream operations in Indonesia.

We maintain our view that there will be significant CPO price weakness going into 2018 as palm oil is likely to see an oversupply by mid-2018. We have “sell” calls on Sime Darby Plantation, IOI Corp and TH Plantations. — UOB Kay Hian, April 24