KEY INVESTMENT HIGHLIGHTS

• Earnings reported above expectation
• Upstream; improved production mostly in Malaysia side
• Downstream; recovery in PPO a bit sluggish
• Earnings estimates; revised higher
• Upgrade to BUY with a revised TP of RM5.43

Above expectation. The 9MFY24's core earnings rebounded higher to RM1.0b (+39.8%yoy) with margins expanding to 7.0% (+1.4pts), supported by both the Upstream and Downstream subsegments. The recuring profit subsegment grew by double digits, although contribution from downstream subsegment was weaker in 3QFY24. However, the pessimism was offset by the recovery of FFB and elevated average CPO prices realised in Malaysia. Overall, the results were above ours and within consensus forecasts, accounting for 83% and 73% of the respective full-year estimates.

Upstream. The 9MFY24 group's upstream bottom-line remained strong, surging to RM1.3b (+39.8%yoy) on higher profit contributions from Malaysia. Operationally, Malaysia's FFB production continued its recovery, showing double-digit growth. However, this optimism was tapered by Indonesia side where production declined by -20.0%yoy due lagging lL- Niño effect and dry weather conditions in recent months. The group's average CPO and PK realised prices increased to RM3,957/Mt (+4.0%yoy) and RM2,194/Mt (+25.0%yoy), respectively. On the other hand, the all-in cost of production remains high, estimated nearly RM2,500/Mt (+23.2%yoy), attributed to the fall in FFB and CPO volume production amidst fixed costs of production.

Downstream. The downstream' s profit settled higher at RM477.0m (+21.4%yoy) thanks to the decent sales volume and steady utilisation rate in differentiated and trading segment in the 1H24. However, the results were weaker in this quarter due to softer profits from the differentiated refineries in Asia Pacific and European regions, impacted by lower margins, and lower share of profit from a joint venture.

Earnings estimates. We are tweaking our earnings forecasts higher, approximately by +2.5%yoy/+28.5%yoy/+26.2%yoy for FY24E-26F, after considering new average CPO TP price revision of RM4,200/Mt, RM4,300/Mt and RM4,000/Mt (previously RM4,000/Mt, RM3,800/Mt and RM3,400/Mt). Our adjustment also taking into consideration higher and lower FFB Yield and OER in Indonesia and PNG side.

Upgrade to BUY. We upgrade our call to BUY with a revised TP of RM5.43 pegged to PER of 22x which nearly 5y average mean - as we roll over our valuation to FY25F EPS of 24.7sen. We remain optimistic with its upstream subsegment where recovery in Group's FFB yield projected to touch 19.00Mt/ha level in FY24, thanks 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 - 21 Nov 2024