Regional Plantation Companies: Looking ahead to 2H22
- Companies performed well in 1H22; real test to be in 2H22
- Wilmar (WIL) to perform well with expanding margin from consumer products
- BAL performed the best in 1H22; meanwhile AALI and LSIP lagged behind peers on older trees profile
- Maintain BUY on WIL, FR, BAL, and LSIP
1H22 result review: Strong earnings on firm CPO selling price.
Most of the companies performed well in 1H22 on firm CPO price trend despite regulatory volatility in 1H22. Bumitama (BAL) and First Resources (FR) performed well in 1H22 due to strong production trend. Meanwhile Wilmar (WIL) benefited from strong refining margin and expanding margin from consumer products. However, Astra Agro (AALI) and London Sumatra (LSIP)’s earnings were noticeably affected by weaker-than-expected production trend.
Lower selling price will be key challenge in 2H22 earnings.
2H22 earnings will be lower vs. 1H22 mainly on lower selling price as the CPO price trend hasn’t recovered back to the 1H22’s record high level. WIL can harvest earnings from downstream, along with the food products division, will continue to perform well. Meanwhile upstream palm oil companies like BAL and FR with strong productivity will likely be able to maintain good earnings performance ahead.
CPO price to stabilise around our forecast price in 2H22.
We think current CPO price is sufficient to maintain good profitability. However, the earnings performance will likely be around 3Q21 level in line, with current CPO price trend, coupled with higher input cost such as fertilisers. Note that most of the companies have already achieved more than half of our FY22F earnings forecast this year.
Palm oil price will drive earnings and share price in 2H22.
Investors priced in weaker earnings in 2H22 despite strong earnings performance in 1H22. With less hassle on regulatory factor, the key thing to watch is the vegetable oil supply and demand dynamic, which we think is heading to positive territory albeit still lower than 1H22 level. Key upside risk for CPO price is weaker-than-expected production trend which we saw even in 2Q22. We highlighted our latest view on price here. We maintain BUY on WIL, FR, BAL, and LSIP.