KEY INVESTMENT HIGHLIGHTS

• Earnings reported slightly above expectation
• Upstream; improved production mostly in Malaysia side
• Downstream; recovery in PPO demand continued
• Earnings estimates; revised higher
• Maintain NEUTRAL with a revised TP of RM4.80

Above expectation. 2QFY24's core earnings jumped to RM415.0m (>50%yoy) with margins expanding to 8.4% (+2.5pts), due to higher operating profit in Malaysia's upstream subsegment following the recovery of FFB and elevated average CPO prices realised. The optimism, however, was offset by the situation in Indonesia and PNG area, where crops were impacted by continuation of dry weather due to EL-Nino and heavy rainfall in earlier part of the year. Nonetheless, refinery profit continues it uptick, rising to RM111.0m (>100%yoy) on recovery demand of PPO products. Overall, the results were slightly above ours but below consensus expectations, accounting for 56% and 44% of respective full- year estimates.

Upstream. The group's upstream top and bottom-line remain strong, where both surged to RM659.0m (+49.8%qoq, +44.2%yoy) and RM637.0m (+59.3%qoq, +96.6%yoy), respectively, following higher profit contributions from Malaysia and Indonesia side. Operationally, Malaysia's FFB production continued its recovery, with double digit growth. This optimism, however, was tapered by Indonesia side where production was down by -22.3%yoy due to ongoing dry weather situation. Note that, group's average CPO and PK realised prices increased to RM4,029/Mt (+7.8%yoy) and RM2,166/Mt (+22.6%yoy).

All-in cost of production on the other hand, remains on the high side, in which estimated nearly RM3,000/Mt (+11.8%yoy).

Downstream. The downstream's profit jumped significantly higher to RM111.0.0m (>100%yoy) thanks to the decent sales volume and steady utilisation rate in differentiated and trading segment. Profit from differentiated (Oleo based) strengthen, driven by improved margins in European operations on the back of higher selling prices.

Earnings estimates. We are tweaking our earnings forecasts higher, approximately by +5.4%yoy/+10.9%yoy/+12.7%yoy for FY24-25F, after considering new average CPO TP price revision of RM3,800/Mt and RM3,600/Mt as well lower FFB production and yield on Indonesia side.

Maintain NEUTRAL. We maintain our NEUTRAL call with a revised TP of RM4.80 pegged to PER of 25.0x which nearly 5y average mean based on FY24F EPS of 19.2sen. We remain optimistic with its upstream subsegment where recovery in Group's FFB yield projected to touch 19.00Mt/ha level in FY24, due to the intensive rehabilitation efforts undertaken last year in Malaysia side. Additionally, downstream prospects look promising on reversal of PPO products demand, in Europe and Asia Pacific regions. However, the downside risk remains on Indonesia area, where production have been sluggish due to the prolonged dry weather, this has led to higher cost of production following fixed costs items remained.

Source: MIDF Research - 22 Aug 2024