Sector Update:
Regional Plantation (Neutral),
Are Current CPO Prices Sustainable?
Regional Plantation (Neutral),
Are Current CPO Prices Sustainable?
We
believe CPO prices may see some weakness in the next couple of months before
picking up again at year-end, when the peak season is over. This is reflected
in the price premium between the spot and futures CPO prices as well as the
sluggish share price movement of plantation stocks. Things to look out for
include the US soybean crop which is harvesting soon, the South American
soybean crop (harvesting in 2Q17) and any potential weather disruptions. We
keep our NEUTRAL sector rating, while our regional Top Pick is still KL Kepong.
¨
CPO
prices may see some weakness soon.CPO prices have recovered quite nicely (+25%)
from the low experienced in July, on the back of continued weak CPO output in
Malaysia and Indonesia in 2Q and early 3Q. CPO inventory levels in Malaysia
remain below the 2m tonne-psychological level (1.46m tonnes at end-Aug), while
exports are strengthening due to the upcoming Deepavali and year-end
festive season. Still, the current strong prices may not sustain for much
longer due to the peak production period for CPO (which has been delayed to
Oct/Nov from Aug/Sep due to El Niño) and the upcoming bumper soybean crop in
the US (harvesting in Oct/Nov) and South America (harvesting in 2Q17).
¨
CPO
production in Malaysia for YTD-Aug is down 15.7% YoY, while output in Indonesia
for YTD-July is down by an estimated 5% YoY. According to our ground checks,
there has not been any significant YoY improvement in output in September –
particularly in Indonesia, where the delayed effects of El Niño continue
to impact productivity. In Malaysia, there have been some improvements in
output in East Malaysia, but not so in Peninsular Malaysia. As such, we believe
the larger jump to peak productivity is likely to only come through in Oct/Nov.
This is likely to result in 2016’s global CPO output falling about 4.7% YoY.
For 2017, barring all unforeseen weather extremities, Oil World projects
CPO output to recover by 8.7% YoY.
¨
The
threat of La Niña has declined considerably to 55% (to occur in
4Q16) vs 76% in 3Q. Although some La Niña–like weather patterns are
present, La Niña thresholds are yet to be met. Some climate models
indicate that a late and weak La Niña is possible. With this threat
subsiding, US soybean harvests are unlikely to be disrupted by any extreme
weather conditions. As at early September, the US Department of Agriculture’s
(USDA) forecast is for soybean crop to come in at 4.2bn bushels (+7% YoY),
which is a fourth consecutive bumper crop year.
¨
Maintain
NEUTRAL on the sector andCPO price assumptions of MYR2,500 per tonne for 2016
and 2017. Our regional Top Pick remains Kuala Lumpur Kepong (KL Kepong) (KLK
MK, BUY, TP: MYR26.40), as its geographically diversified landbank will fare
well during extreme climate conditions, while downstream operations in Indonesia
enjoy a tax advantage over Malaysia. In Singapore, we prefer Golden Agri (GGR
SP, BUY, TP: SGD0.44), while in Indonesia, we prefer London Sumatra (LSIP IJ,
BUY, TP: IDR1
Kindly click the following link for the full report: Are Current CPO Prices Sustainable?
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
