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Author: kltrader   |   Latest post: Thu, 28 Nov 2019, 4:49 PM

 

Plantation - CPO Price Up-cycle? – No Clear Indication Yet

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  • We revise our average CPO price forecast to RM2,050/MT from RM2,280/MT previously for 2019; -8% lower than last year’s average of RM2,235/MT.
  • Demand is expected to be slower post-festivities, however for 2019, demand might be at 17.61m tones or +6.8% yoy.
  • CPO production is forecast to increase by 2.4% to 19.99m tonnes in 2019 on account of higher percentage of new area entering maturity and higher yielding age brackets.
  • Inventory level is expected to decline to 2.42m tones in 2019 although still substantially higher than 2016’s level of 16.70m tonnes.
  • Maintain Underweight the sector against the likely scenario that a lower ASP of palm products would continue to be a risk to planters’ earnings.

No indication of CPO price up-cycle yet

A lower ending level of PO stock would not benefit CPO price if export continued to slow or demand remained muted. We expect CPO price to stay unexciting in the near term as we estimate no significant change in demand amid cheaper Ringgit and wider discount gap between palm oil (PO) price and soya bean (SBO) price.

What to expect in 2H2019?

Given the weak market sentiment due to the US-China trade war impact and ample supply of edible oils, we believe CPO price for 2H2019 will trade within a range of RM1,900/MT – RM2,200/MT vs. our previous forecast of RM2,100/MT – RM2,500/MT. We believe plantation companies are at risk of further earnings disappointment in the next 2019’s quarter earnings as CPO price realized is expected to hover between RM1,900/MT-RM2,100/MT against RM2,393.50/MT– RM2,550.50/MT in Q2 2018. We maintain our earnings forecast for companies under coverage, which is expected to be a mixture of positive and negative growth in 2019.

Underweight call on sector retained

We have revised lower our average CPO price forecast (local delivery) for 2019 to RM2,050/MT from RM2,280/MT previously, and RM2,200/MT for 2020 (previous forecast:- RM2,350/MT). We anticipate 5 primary issues will likely play out in the second half of 2019, hence exerting downward pressure on CPO oil prices namely 1) sluggish export demand, 2) higher CPO inventory, 3) bearish soybean and soybean crude oil prices – CPO losing its competitiveness, 4) volatile crude oil prices; and 5) low biodiesel off-take.

Given the lack of rerating catalyst, we retain our Underweight recommendation. Currently, at this juncture, most of the companies under our coverage are fully valued and are at risk of further earnings disappointment on weak palm product prices outlook. We have Hold on KLK (TP: RM23.34), BKawan (TP: RM16.33), HAPL (TP: RM1.68), TSH (TP: RM1.00), GENP (TP: RM10.33), SOP (TP: RM2.46), FGV (TP: RM1.13), IJMP (TP: RM1.47), Sarawak Plant (TP: RM1.65) and SDPL (TP: RM5.03); whilst a Buy on IOI (TP: RM5.00) and a non-rated for TH Plant.

Source: BIMB Securities Research - 5 Jul 2019

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