We upgrade the sector to MARKET WEIGHT from UNDERWEIGHT. The plantation sector has underperformed the market for five months in tandem with the weakness in CPO prices. Stocks are now trading closer to 1SD below 5-year mean from the peak of 1SD above mean. In view of higher crude oil prices now and steady demand so far, CPO prices should have already hit the bottom and should stabilise at the current range. However, there is a lack of strong catalysts to lift CPO prices way above RM2,600/tonne. We maintain 2018 CPO ASP assumption at RM2,400/tonne. CPO prices could have hit the bottom; upgrade to MARKET WEIGHT. We upgrade the Malaysia plantation sector to MARKET WEIGHT from UNDERWEIGHT as crude palm oil (CPO) prices are likely to hit the bottom and trade sideways for the next 12 months. There is no strong catalyst to trigger an upgrade to OVERWEIGHT but we see limited downside risk due to better gasoil prices of US$650-700/tonne and lower soybean supply.
Biodiesel to buffer downside risk. Biodiesel demand could be higher than expected in 2H18 on higher crude oil prices currently. The potential extra demand is set to come from non-mandated biodiesel blending. At the current gasoil price of US$650-700/tonne, no subsidy is required for biodiesel blending in Indonesia. Meanwhile in selected areas in Kalimantan, biodiesel is now cheaper than diesel, which could translate into higher blending of biodiesel. For 2018, Indonesia is expected to increase domestic biodiesel usage to 3.6m kilolitres (kl), up from 2.5m kl of biodiesel in 2017 (40% yoy or +1.0m kl). Coupled with the B25 mandate, biodiesel made up 6% of 2018 global palm oil consumption or about 30% of 2018 palm oil inventory.
But high supply and inventory may limit CPO price upside:
Upgrade Malaysia plantation to MARKET WEIGHT. We upgrade Malaysia plantation to MARKET WEIGHT from UNDERWEIGHT. As we are not expecting further weakness in CPO prices, we reckon the sector is now trading at its near-term fair value. CPO prices are likely to trade sideways, waiting for stronger re-rating catalysts eg much stronger biodiesel demand or disappointing production. We maintain BUY on Kim Loong and upgraded Sarawak Oil Palms recently as the latter’s share price has weakened significantly since Jan 18 (-18.5%) and we believe the expected CPO price weakness for 2018 has been priced in.
Source: UOB Kay Hian Research - 8 Jun 2018
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