Highlights

We believe it is increasingly difficult for CPO price to achieve our average CPO price forecast given the weak sentiment arising from:

1. Bumper soybean crop from the South America is negative for soybean oil price, which will in turn cap upside of CPO price; and

2. Demand from major palm oil consuming nation unlikely to pick up significantly in the near term. High stockpile in both China and India will likely limit significantly pick-up in demand from these two countries. On the other hand, biodiesel consumption outlook in the EU remains uninspiring.

In view of the disappointing CPO price movement YTD and the lack of near-term positive demand catalyst, we are lowering our average CPO price assumption in 2013 by RM300 to RM2,500/mt, and lowering our assumption in 2014 and beyond by RM200 to RM2,600/mt.

2013-2015 net profit forecasts of plantation companies under our coverage were lowered by 1.6-20.5% to reflect our lower CPO price assumptions in 2013-2015. Post earnings revision, recommendation for Genting Plant and Sime Darby downgraded from Hold to Sell. Recommendation maintained for CBIP (buy), IJMP (Sell), IOI (Sell), KLK (Hold) and TSH (Sell).

We believe 1Q13 results will likely disappoint again, given the lower CPO price achieved. Low CPO prices aside, we note that production cost may come in higher than expected.

Catalysts (downside)

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO;
• India imposes import tax on CPO; and
• Longer-than-expected CPO price recovery path.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil; and
• Further action from the Malaysian Government to boost competitiveness of downstream plantation players.

Rating

UNDERWEIGHT

• Negatives – (1) Weak global economic outlook; (2) Impending excess supply of CPO; (3) Demand risks from major vegetable oil consuming countries; and (4) Pricey valuations.
• Positive – CPO is still relatively cheaper than soybean oil.

Top picks

• CBIP (BUY; TP: RM3.42)

Source: Hong Leong Investment Bank Research - 30 Apr 2013