KUALA LUMPUR (June 10): Hong Leong Investment Bank (HLIB) Research has downgraded planters FGV Holdings Bhd, Hap Seng Plantations Holdings Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK) on the back of lower-than-expected fresh fruit bunch (FFB) output.

In a note on the plantation sector, HLIB said that it was downgrading FGV to "sell" with a target price (TP) of 89 sen, from "hold" with a 88 sen TP.

Hap Seng Plantations has been downgraded to "hold" with a TP of RM1.51, from "buy" and RM1.45 TP.

IOI now has a "sell" call and RM3.82 TP attached to it, from a "hold" call and RM3.88 TP.

Meanwhile, KLK saw its rating downgraded to "hold" from "buy", with no changes made to its RM22.82 TP.

HLIB said that seven of the nine plantation companies that it covers had reported their quarterly results. It said of these seven companies, four came within its expectations, while three — FGV, IOI and Sime Darby Plantation Bhd (SDP) — disappointed.

The research house opined lower-than-expected FFB output and higher crude palm oil (CPO) production cost were the main reasons for the earnings shortfall seen (particularly for FGV and SDP).

HLIB said during the first quarter of the year, the dip in FFB output was mitigated by higher CPO selling prices, which resulted in four of the seven companies it covers posting better performances on a year-on-year (y-o-y) and quarter-on-quarter (q-o-q) bases.

"We note the weaker q-o-q and y-o-y performances reported by FGV, Hap Seng Plantations, and IOI were due mainly to their more significant exposure to Sabah operations. Apart from significantly lower FFB output, IOI was impacted by losses registered at its 30%-owned associate (Loders, as a result of provision for doubtful debts and mark-to-market losses for commodity derivatives)," it noted.

When compared with the fourth quarter of 2019 (4Q19), realised CPO prices in 1Q20 tracked closer to the average spot CPO price of RM2,636 — indicating a minimal forward sales during the quarter.

HLIB Research also viewed that since early-May, CPO spot prices have recovered 15% to RM2,378 a tonne, fuelled by the easing of Covid-19 lockdown measures, improved business ties between Malaysia and India, the Indonesian government's commitment to its B30 biodiesel programme, and the Malaysian government's decision to exempt export duties on palm oil products — including crude and refined palm oil and palm kernel oil.

"We maintain our 2020-2021 average CPO price assumptions of RM2,350-RM2,400/mt for now, as we believe it takes time before full swing demand recovery takes place. Besides, we note current Palm Oil-Gas Oil spread remains uneconomically viable for discretionary blending," it said, while maintaining its neutral rating on the sector.