Sector update:
Plantation (Neutral)
El Nino Impact Fully Priced In, Time To Look Forward
Plantation (Neutral)
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.
Kindly click the following link for the full report: El Nino Impact Fully Priced In, Time To Look Forward
Best regards,
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
