• Top Picks remain a mix of pure and integrated planters - IOI Corp, Sarawak Oil Palms and PP London Sumatra Indonesia (LSIP). PO inventory slipped to 1.73m tonnes in July from recovering exports, but offset by higher production. We expect PO inventory to continuously increase, potentially crossing the 2m tonne mark around November-December. Main catalyst to watch is La Nina – whose probability remains high at 85% in 4Q24. On the upcoming results season, we expect better QoQ earnings with mostly in-line earnings. Stay NEUTRAL.

• 2Q24F earnings to improve QoQ for Malaysian and Indonesian planters, as QoQ FFB output has started to show positive growth, while spot CPO prices remained above MYR4,000/tonne during the quarter. In Malaysia, FFB output of the companies under our coverage increased by an average c.10% QoQ, while spot CPO prices were flattish at MYR4,037/tonne (+0.8% QoQ). In Indonesia, we estimate that 2Q24 FFB output for stocks under our coverage increased by a larger 13% QoQ (based on seasonal trends) while CPO prices – net of taxes – slightly decreased 1.5% QoQ.

• YoY, both Malaysian and Indonesian planters should also see higher earnings in 2Q24F. In Malaysia, YoY output trends were largely higher with average output for companies under our coverage lifted 6.4% YoY in 2Q24, while CPO prices also rose 5.1% YoY. In Indonesia, while output trends for stocks under our coverage were mixed, with flattish (+ c.1.7%) output YoY in 2Q24, CPO prices net of taxes, rose 10% YoY. As usual, figures from the Indonesian Palm Oil Association or GAPKI in YTD-May differed, with a 3.2% YoY drop vs +0.5% YoY in YTD-Apr 2024.

• Overall, we expect 2Q24F to record largely in-line earnings, based on our estimates of production levels alone (Figure 1). Two companies may underperform forecasts (Bumitama Agri and Astra Agro Lestari – results already released), while LSIP reported stronger-than-projected results. All in, we expect eight planters to book numbers that are largely in line.

• For Indonesian planters with downstream operations, we expect margins to improve QoQ from a larger tax differential between upstream and downstream products (+c.28% QoQ) of USD54/tonne (vs USD43 in 1Q24). YoY however, Indonesian margins could weaken in 2Q24 due to the smaller tax differential (from USD63 in 2Q23). Malaysian downstream counterparts may also see slightly weaker QoQ margins due to the increase in competition from Indonesia, although this could be offset by stronger demand dynamics.

• In Malaysia, inventory levels decreased 5.4% MoM to 1.73m tonnes, due to higher exports (+39.9% MoM) but offset by higher production (+14% MoM). Going forward, we expect stock levels to gradually improve and potentially cross the 2m-tonne mark around November-December, barring any unforeseen weather issues, like La Nina.

• Maintain our NEUTRAL sector call. We make no changes to our CPO price assumption of MYR3,900/tonne for 2024 and MYR3,800/tonne for 2025.

Source: RHB Securities Research - 13 Aug 2024