This article first appeared in The Edge Financial Daily, on November 5, 2015.

Plantation sector 
Maintain neutral: Despite a high production season in the third quarter of 2015 (3Q15), pure upstream players are likely to report flat or weaker year-on-year (y-o-y) net profit in 3Q15 as growth in production will be largely offset by the decline in average crude palm oil (CPO) prices (-6.7% quarter-on-quarter [q-o-q], -7.3% y-o-y). 

Sabah-based companies such as IJM Plantations Bhd and TSH Resources Bhd are likely to be underperforming compared with their peers as their production contracted 8% to 22% y-o-y (down 0.5% to 4.7% q-o-q), affected by the lagged impact from the first half of 2015’s (1H15) dry weather in Sabah. However, IJM Plantation’s 2Q ended Sept 30, 2015 (2QFY16) net profit would be partly supported by the drawdown of inventory built up in the previous quarter. 

Sime Darby Bhd has reported double-digit y-o-y growth in fresh fruit bunch (FFB) and CPO production. This is likely to come from the incorporation of production from New Britain Palm Oil Ltd that it acquired recently, while its Malaysian and Indonesian FFB productions were up 1% and down 12% y-o-y respectively. However, we believe that Sime Darby’s earnings will continue to be dragged down by its industrial division.

Earnings are likely to be distorted by currency depreciation in the sector. The rupiah has depreciated 9.9% q-o-q (-20.2% y-o-y) against the US dollar, while the ringgit has depreciated 16.5% q-o-q (-34% y-o-y) against the US dollar in 3Q15. The translation gains or losses arising from the currency depreciation will affect companies with exposure to Indonesia’s rupiah- and US dollar-denominated loans. 

Outperformers are likely to come from integrated players such as IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK). The refining margin tends to be better in 2H, given more CPO supplies in the market. Also, IOI Corp and KLK have exposure to the oleochemical business, which is commanding decent margins as they focus more on niche and higher-margin products. — Hong Leong IB Research, Nov 4