Sector
update:
Regional Plantation (Neutral)
a Bumper Crop Year?
Regional Plantation (Neutral)
a Bumper Crop Year?
We
believe CPO prices would remain at high levels up to 1Q17, on the back of the
still weak CPO output and strong USD. However, post-1Q17, we believe prices are
likely to weaken, as the recovery in CPO output would coincide with the South
American soybean harvest, which should put pressure on vegetable oil prices. We
maintain our MYR2,500/tonne CPO price assumption for 2017, expecting prices to
trade at a volatile range of MYR2,300-3,000/tonne during the year. No change to
our NEUTRAL sector call and our regional Top Pick of Kuala Lumpur Kepong.
¨ CPO prices shadowing
soybean price movement. CPO prices have risen to new highs, at close to
MYR3,000/tonne at the time of writing (+12% MoM and 27% YTD). We believe this
was in response to the surprise US election result, which led to USD/MYR
strengthening by as much as 7% in the last month. This – together with the
recent spike in crude oil prices on the back of the Organisation of the
Petroleum Exporting Countries’(OPEC) decision to cut oil production, and several
other factors in the US – led to a sharp rise in soybean prices (up 11% in one
month) to USD0.375/bushel, bringing YTD price increase to 29% YoY. CPO prices
followed suit, bolstered also by the lower-than-expected CPO output in Malaysia
in October, and the unexpected early end to the peak season.
¨ CPO prices to stay
moderate after 1Q17.
Going forward, we believe CPO prices are likely to stay at current high levels
until 1Q17, given the anticipated weakness in output in 1Q17, coming from the
24-month lagged impact of El Nino. However, post-1Q17, we expect a
marked recovery in CPO output, as productivity bounces back post-El Nino.
This, together with the higher soybean output that is expected to come out from
South America during the same period, would start to weigh on CPO prices. We
expect CPO prices to range between MYR2,300-3.000/tonne in 2017, with an
average of MYR2,500/tonne.
¨ Demand to remain
lacklustre.
On the demand front, we expect demand from India to pick up once the short-term
impact from the INR fiasco dies down. However, China’s demand is likely to
remain anaemic, on the back of the abundance of soybean crop as well as its
soybean and rapeseed oil held in government reserves.
¨ NEUTRAL sector call maintained, with unchanged CPO price
assumptions of MYR2,500 per tonne for 2016 and 2017. Our regional Top Pick
remains Kuala Lumpur Kepong (KLK MK, BUY, MYR26.80), given its geographical
landbank diversity, exposure to Indonesian downstream operations which enjoys
tax advantages and relatively inexpensive valuations versus its peers. We also
like Sime Darby (SIME MK, BUY, MYR9.25) in Malaysia for its restructuring
angle, given management’s plans to unlock value from the group. In Singapore,
we like Golden Agri-Resources (Golden Agri)(GGR SP, BUY, SGD0.46) for its
diversified geographical landbank, while its integrated operations well as
soybean crushing enables it to capture margins all across the industry
spectrum. In Indonesia, we like London Sumatra (LSIP IJ, BUY, IDR2,050)
due to its undemanding valuations, its net cash and its good stock liquidity.
Kindly click the following link for the full report: 2017 – a Bumper Crop Year?
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
