Regional Sector update:
Plantation (Neutral)
Share Prices Lagging CPO Prices
Plantation (Neutral)
Share Prices Lagging CPO Prices
Share
prices of most plantation stocks have not performed in line with CPO prices,
possibly due to the anticipated strong recovery in FFB output likely to come
from Indonesia. It could also be due to the market’s cynicism that CPO prices
would remain at current high levels. We continue to advocate a trading strategy
for the plantation sector – buying liquid high beta stocks capable of
surprising on the upside in terms of FFB output. NEUTRAL.
¨ Share prices not
moving in line with CPO prices.CPO prices remain above MYR3,000/tonne
currently. We maintain that the current high prices are likely to remain up to
end-1Q17. However, we note that despite the current high prices, only the
Singapore Exchange (SGX)-listed and Jakarta Stock Exchange (JSX)-listed stocks
have moved in a similar direction to CPO prices (Figures1 and 2). Most
Malaysian-listed stocks have not performed in line with CPO prices, with the
exception of Sime Darby (Figures 3 and 4). This could be due to:
i. The valuation premium that Malaysian stocks
command;
ii. The anticipated strong recovery in FFB output
which is likely to come more from Indonesia, rather than Malaysia;
iii. The cynicism of investors that CPO price can
hold on at current levels. This cynicism is also reflected in the CPO futures
price (four months and above), which is trading at a 10% discount to spot
prices.
¨ Still reflecting
prices of MYR2,400-2,600/tonne.It is also important to see what current
share prices are reflecting in terms of CPO prices now (Figure 5). Based on our
analysis, most stocks are still reflecting CPO prices of MYR2,400-2,600/tonne,
which corroborates our view that the market does not expect current higher
prices to sustain. Stocks reflecting CPO prices above those levels include IOI
Corp (IOI), TSH Resources (TSH), IJM Plantations (IJMP) and Felda Global
Ventures (FGV).
¨ 4Q16 results likely
mainly in line. We
continue to advocate a trading strategy, given our expectation that CPO prices
are likely to moderate post-1Q17. As such, we like stocks that are
capable of surprising on the upside in terms of earnings and liquid high-beta
stocks. For the upcoming results, we believe most earnings would come in within
expectations, with four companies – IOIC, FGV, Sarawak Oil Palms (SOP) and TSH
– likely to post disappointing earnings due to weaker-than-expected FFB output.
We also up our forecasts for two stocks which look capable of posting
better-than-expected earnings – BumitamaAgri and First Resources. We raised our
forecasts to impute our latest in-house exchange rate assumptions, higher FFB
output and PK prices.
¨ Risks include extreme
climate conditions, a change in demand and supply dynamics and extreme
fluctuations of exchange rates and crude oil prices.
¨ Still NEUTRAL. We expect volatility
to be the name of the game in 2017, with the current strong CPO prices
moderating after 1Q17, as CPO production recovers more significantly and
soybean crop from South America starts being harvested. We keep our
MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Picks –
Kuala Lumpur Kepong (KLK), Golden Agri-Resources and London Sumatra – remain.
We also like Sime Darby as a restructuring play.
Kindly click the following link for the full report: Share Prices Lagging CPO Prices
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
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