Upstream Plantations Expected to report improving YoY results
...or so says CGS International (no longer CGS CIMB)

CGS issued a sectoral update report few days back, after most planters had released their monthly/quarterly disclosures on production. The stocks mentioned here are $GENP / 2291 (GENTING PLANTATIONS BERHAD) $IOICORP / 1961 (IOI CORPORATION BERHAD) and $TAANN / 5012 (TA ANN HOLDINGS BERHAD) ... of which GenP they view positively because of their landbank and property in Johor, IOI negatively because of their downstream exposure, and Ta Ann positively because it's cheap.

Very interesting.

There are also a few other points from the report that I think it's worth paying attention to, which I briefly summarize here.

1. Total FFB produced for the companies in their universe fell by 1% yoy, but CPO output increased ~40% yoy. on a QoQ basis, generally the whole industry would experience declines as seasonal factors kick in.

2. Avg CPO price in 1Q was RM 3983/MT.

3. CGS expects improvements in YoY results mainly due to improved production, stable CPO prices, and decreasing fertiliser costs. Upstream companies are expected to report robust 1Q results, but a slowdown in the downstream segment might impact more integrated palm oil companies.

4. They foresee a good support for CPO prices above the RM 3800 level.

5. Interestingly, they say that 18x PE is a *reasonable* valuation.

6. They also maintain their buy call on Ta Ann for its "attractive valuation" at 10x PE, net cash position, "decent" RoE (of around ~8.7%) and dividend yield of around 5%.

For the most part, I will ignore their call on GenP as it becomes more like a pseudo property stock which, imo, is not so relevant when talking about palm oil plantation companies. As in, if I wanted a plantation company, there are cheaper options; if I wanted a property company, there are also cheaper options.

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What actionable insights can we take away from here?

7. Looking at the reported numbers, it is surprising to me that many estates actually report a decline YOY in terms of FFB harvests. QOQ declines are very expected, as I had elaborated before, since Q1 is almost always low season due to weather phenomenon. Which companies buck the trend of declining harvests YOY? Those would be the ones I would pay closer attention to, at this signifies that the companies are doing something right compared to the broader competition.

8. Looking at MPOB statistics, we get a good "benchmark" of what an average plantation's operational matrix is like;
- Avg FFB yield at 3.5 MT per hectare
- Avg OER at 19.7%

From the above we can have 2 takeaways:

i) Which companies are outperforming the national average?

Over the long term, investing in the top companies in a given sector (especially such an important one in Malaysia) would probably be a smart idea, and the national gold standard, in my opinion, $UTDPLT / 2089 (UNITED PLANTATIONS BERHAD), is already running circles around their competition. Typically, industry leaders tend to be priced a premiums to the average, which makes sense.

ii) Which companies are *underperforming* the national average?

This shows potentially room for unexpected growth and operational improvements, which could be a surprise upside if things have not yet been priced in as typically these companies would traded at a discount to the industry average. One way to verify is to check their track record, and see whether or not the operational performance has indeed been slowly improving so you're not just blindly betting on a company to improve, but have good reason to believe so.

An analogy to the above would be:
It's far easier to improve your marks in an exam from 50% to 70%, than it is to improve it from 90% to 100%.

Hope this offers a fresh perspective on looking at plantations!