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Good morning,
Plantation: El Nino
Impact Fully Priced In, Time To Look Forward
We
are downgrading our regional sector recommendation to NEUTRAL (from
Overweight). While we continue to expect some price support for CPO in the
near term (on the back of the current low inventory levels in Malaysia and
Indonesia), we believe the impact of El Nino on CPO prices has already
been fully reflected. The catalyst required to move prices upward again in a
significant manner would be a turnaround in demand growth as well as the
emergence of a strong La Nina phenomenon. Should this materialise, CPO
prices ought to see another upward thrust in 2017.
¨ 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
MYR2,716/tonne high at the start of May from a MYR1,806 low at end-Aug 2015 –
prices did not stay high long enough for the plantation companies to truly
benefit. This was given the significant negative impact on productivity.
Malaysia’s FFB production in YTD-May fell 16.8%, while Indonesia’s rose by an
estimated low single-digit percentage. In previous strong El Nino
episodes, CPO prices rose by an average of 30%, and between a 20% and 110%
range.
¨ Demand
growth to continue at slower pace, aided by biofuel mandates. We are now assuming
that demand continues at its current slower rate of growth, given
expectations that the global economic recovery is still in progress. However,
demand would continue to be boosted by the increased biofuel mandates that we
have seen in several countries. We expect global demand for CPO to grow at a
rate of 2-4% pa, down from the average growth rate of 6-7% seen in 2003-2013.
The nation that consumes CPO at the fastest growing rate is now Indonesia,
followed by China and then India.
¨ Trimming
CPO price assumptions. Given the faster-than-expected retreat of CPO prices,
we now expect prices to trade between the range of MYR2,300-2,700/tonne for
the rest of the year. As a result, we are trimming our CPO price forecast to
MYR2,500/tonne for 2016, and keeping it flat for 2017 (from MYR2,750) and
2018 (no change).
¨ Next
catalyst required – La Nina. Going forward, besides a turnaround to
demand growth, the other 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 were to occur, history
tells us that CPO prices would also react positively (ranging from 20%-plus
to 65%), as strong soybean prices – caused by drought in the Western
Hemisphere – ought to pull CPO prices up. If a strong La Nina does not
occur, we expect prices to remain relatively range-bound next year, as the
positive after effects of El Nino on CPO prices could be offset by
lacklustre global demand.
¨ Downgrade to NEUTRAL. With the CPO price
assumption reduction, we downgrade the sector to NEUTRAL (from Overweight).
We also downgrade First Resources, TSH Resources and Sarawak Oil Palms to
NEUTRAL (from Buy), and IJM Plantations to SELL (from Neutral). Our regional
Top Pick remains Kuala Lumpur Kepong (KL Kepong). We like Golden
Agri-Resources (Golden Agri) (Singapore) and London Sumatra Indonesia
(Lonsum) too. (Hoe Lee Leng, Hariyanto
Wijaya, CFA, CPA, Christine Chua)
Link to report: El Nino Impact Fully Priced In, Time To Look Forward
Link to Daily
report: Indonesia Morning Cuppa - 200616
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Company Update:
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Astra Agro Lestari
(AALI IJ, BUY, TP: IDR17,400), Trimming Down CPO Price Assumptions
Following a
sector-wide CPO price downgrade, we revise our TP to IDR17,400 (from
IDR17,800, 18% upside) but keep our BUY call as we think it is a sector
laggard play, booking a negative share price performance YTD vs the Indo agri
sector’s single-digit positive. Our TP is based on an unchanged target P/E of
16.5x (its 10-year mean P/E) on FY17F revised EPS as we roll forward our
valuation to FY17 earnings. The TP implies EV/ha of USD14,342, which is
within the range of locally-listed planters’ USD7,700-21,600.
Link to report: Astra Agro Lestari : Trimming Down CPO Price Assumptions
London
Sumatra (LSIP IJ, BUY, TP: IDR1,850), Trim Down CPO Price Assumptions
London
Sumatra (Lonsum) is our Top Pick among Indonesian planters. Following a
sector-wide CPO price downgrade, our TP is revised to IDR1,850 (from
IDR1,950, 24% upside). Maintain BUY due to its:
1. Undemanding valuation. Its current EV/ha of USD7,704 is
almost as cheap as the cost of new planting;
2. Clean balance sheet (no debt at all);
3. Cash on balance sheet of IDR863bn.
Our TP is based on an unchanged 16.4x P/E
target on FY17F revised EPS as we roll-forward our valuation target. Our TP
also implies EV/ha of USD9,565, which is within the range of Indonesia-listed
planters.
Link to report: London Sumatra (Indo) : Trim Down 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.
Link to report: Sawit Sumbermas Sarana : Trimming CPO Price Assumptions
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Media Highlights:
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Economics
Indonesia’s external
debt in April 2016 grew by 6.3%
Corporates
Summarecon launched
Karawang township
Summarecon Agung
(SMRA IJ, SELL, TP IDR1,480) launch. Last week they launched its new township
project in Karawang, Summarecon Emerald. Two clusters were launched, Advani
(254 units) and Elora (85 unit). Advani were 100% sold out while 38 units or
45% Elora are sold.The company has yet disclosed much presales value
generated from the launch, however assume average price is about
IDR700m/unit, estimated sales value would be around IDR200bn. We believe the
excellent launch once again proof the company's good execution and strong
appetite on consumers' appetite to Summarecon product. However, we on
contrarian are still concerns on:
i. Company’s high
gearing level. Note that company gearing level has almost tripled from 2011
ii. Initial high capex
to start new townships
iii. NUP of about 300
units vs total 292 units sold, not really as high demand compare to Bandung
launch
iv. Payment profile of
the buyers (mortgage, installment or hard cash) might affect the balance
sheet. Note we still wait for this information too.
As such we still
keep our SELL recommendation, on the gearing concern. Valuation wise is not
cheap too.
However the launch
news and last week BI rate cut & LTV relaxation might spur positive
sentiment and momentum for the share price.(Lydia Suwandi)
Palembang LRT contract targeted to be
signed this week
Wijaya Karya aim for Jakarta-Cikampek
elevated toll road concession
Ciputra Properti to launch apartment in CBD
Jakarta
MNC Group prepares USD1bn for megaproject
in Lido
Puradelta Lestari to boost recurring income
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
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