Company update:
Sawit Sumbermas Sarana (SSMS IJ, BUY, TP: IDR2,050)
Trimming CPO Price Assumptions
Sawit Sumbermas Sarana (SSMS IJ, BUY, TP: IDR2,050)
Trimming CPO Price Assumptions
Following
a sector-wide CPO price downgrade, we lower our TP to IDR2,050 (from IDR2,100,
11% upside). Reiterate BUY as we believe Sawit Sumbermas’ favourable plantation
age profile would enable the company to enjoy one of the highest volume growths
among its Indonesian plantation peers. Our revised TP is based on a P/E target
of 20x (from 19x) on FY17F revised EPS, as we roll forward our valuation to
FY17F. Our TP implies an EV/ha of USD24,070, vs Indonesia-listed planters of
USD7,700-21,600.
♦ High CPO prices not
sustained for long enough. Although the recent strong El Nino episode did
result in CPO prices rising by as much as 50% (to a high of MYR2,716 in early
May 2016 from a low of MYR1,806/tonne at end-Aug 2015), CPO prices did not stay
high long enough for the plantation companies to truly benefit, given the
significant negative impact on productivity. Malaysia’s FFB production in
YTD-May fell 16.8%, while Indonesia’s FFB production rose by an estimated low
single-digit percentage. In previous strong El Nino episodes, CPO prices
rose by an average of 30% and within a range of 20-110%.
♦ Trimming CPO price
assumptions.
To arrive at our original average CPO price assumption of MYR2,700/tonne for
2016, we had initially projected CPO prices to stay at high levels of
MYR2,700-2,900/tonne in 2Q, before taking a breather in 3Q and rising again in
4Q. However, CPO prices have recently moderated to around MYR2,630/tonne. We
believe this could be due to the anticipated recovery in CPO output in 2H16, as
well as concerns on demand weakness. We believe the previous concerns surrounding
the bumper harvests of soybean are no longer valid, given the recent spate of
flooding in Argentina, a drought in Brazil and potential upcoming droughts in
North America as a result of La Nina.
♦ Given the faster-than-expected retreat
in CPO prices, we now expect CPO prices to trade within the range of
MYR2,300-2,700/tonne for the rest of the year. As a result, we are trimming our
CPO price forecasts to IDR7,648/kg for 2016 (from IDR7,978/kg) and IDR7,903/kg
for 2017 and 2018 (from IDR8,145/kg).
♦ Next catalyst
required – La Nina. Going forward, the next catalyst for prices would be
the onset of La Nina, the probability of which is now at 76% for 4Q16.
We have not imputed this into our forecasts as yet. If a strong La Nina
occurs, history tells us that CPO prices would react positively (ranging from
+20-65%), as strong soybean prices caused by a drought in the western
hemisphere would pull CPO prices up. If a strong La Nina does not
develop, we expect prices to remain relatively range-bound next year, as the
positive after effect of El Nino on CPO prices could be offset by
lacklustre global demand.
♦
Maintain
BUY with a revised IDR2,050 TP (from IDR2,100). With the reduction in
CPO price assumptions, we cut our earnings by 26-41% for FY16F-17F. We also
roll forward our valuation targets to 2017.
Kindly click the following link for the full report: Sawit Sumbermas Sarana : Trimming CPO Price Assumptions
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
