Investment Highlights

• Average CPO price assumption of RM2,300/tonne in 2020F (2019E average spot price: RM2,100/tonne). We are NEUTRAL on the sector as we believe that the PE valuations have already priced in the improvement in CPO prices. We reckon that there is limited upside to CPO price and CPO prices are “toppish”. As such, we think that CPO prices are priced to perfection and have already reflected the bullish factors. We reckon that this is an opportune time to take profit on some plantation stocks. We have SELLs on Sime Darby Plantation (fair value: RM4.90), FGV Holdings (fair value: RM1.10) and TH Plantations (fair value: RM0.45).
   
• Our average CPO price assumption of RM2,300/tonne implies a trading range of RM2,100/tonne to RM2,500/tonne in 2020F. Valuation-wise, the big-cap plantation companies are currently trading at FY20F PEs of 25x to 41x while the smaller ones are trading at FY20F PEs of 22x to 27x.
• We are also neutral as although industry supply of CPO is expected to ease in 2020F, this might be offset by lower demand from China and India. We forecast FFB production of the companies under our coverage to increase by -1.6% to 14.0% in FY20F. The unexciting FFB output growth can be attributed to a few reasons. First, planters are aggressively replanting ageing oil palm trees in 2020F. Second, FFB yields may soften in 2020F due to the lagged impact of the dry weather, which hit Indonesia from July to September 2019. FFB production of the companies in our coverage fell by 0.2% to 15.6% in 2016 due to the El Nino phenomenon in 2015. Malaysia’s CPO production slid by 13.2% in 2016.

• We have not assumed any major decline in the FFB production of the planters in our coverage yet as we think that the lagged impact of the drought would only be felt in 2H2020. Effects of the drought on FFB yields are usually more pronounced 12–24 months after the dry weather had taken place. The large planters are expected to replant aggressively in FY20F. IOI Corporation is planning to replant about 11,000ha or 6% of planted areas in FY20F. KL Kepong is planning to replant roughly 11,000ha or 5% of planted areas in FY20F. Sime Darby Plantation is planning to replant approximately 25,000ha to 30,000ha or 4% to 5% of planted areas in FY20F.

Developments in 1H2020:

• Palm demand from China and India may ease in 2020F. In contrast to market expectations, we think that palm demand from China and India may soften in 2020F. We reckon that stockpiles of vegetable oils are high in China and India as the two countries had aggressively purchased palm oil in 2019. In addition, China renewed its purchases of US soybeans in 2H2019, increasing the supply of soybean oil in the country. Hence, there is less need for palm oil.

• Also in the short term, India’s palm demand may decline as the Solvent Extractors Association of India has asked the local players to shun palm products from Malaysia. Buyers in India have the option of switching to palm oil from Indonesia, soybean oil from Argentina and sunflower oil from Ukraine. This was in response to news that the India government may restrict imports of products from Malaysia due to Prime Minister Tun Dr Mahathir Mohamad’s statement in September 2019 that India had “invaded” Kashmir and Jammu.

• According to the MPOB, India’s imports of Malaysia’s palm products fell by 29.2% MoM in October. Intertek reported that Malaysia’s palm shipments to India slid by 7.7% in November compared with October.

• We think that China’s palm purchases in 2020F would fall below 2019E’s 7mil tonnes as it switches back to soybean. We reckon that China’s demand for soybean meal would improve on the back of a recovery in hog population in 2020F. In contrast to our view, Oil World has forecast that China’s palm demand would rise to 7.3mil tonnes in 2020F from about 6.8mil tonnes in 2019E. Previously, China’s highest level of palm imports was 6.3mil tonnes in 2012.

Source: AmInvest Research - 23 Dec 2019