Highlights

Despite having received more inquiries on spot CPO from both refineries and traders lately, management highlighted that more inquiries may not translate to better demand for CPO in the near term, and it feels that near-term demand and price (for the next one month) will likely be capped.

Despite the higher production volume, management feels that the Indonesian operations will likely remain in a small loss position in FY03/14, due to losses incurred in 1QFY03/14 (arising from low utilization at the new CPO mill) and current CPO price level. FY15 will turnaround but depends on the quantum of the potential minimum wage hike in Indonesia next year.

We believe performance in 2QFY03/14 (excluding unrealized forex translation loss) will improve from 1QFY03/14 as: (1) The net realizable value of its current CPO inventory (around 14,000 mt as of end-Aug, or about 5,000 mt more than its usual stock level) is at circa RM50-100/mt lower than the current spot CPO price; and (2) Higher FFB output (arising from more land bank coming into production as well as higher yield).

Management is keeping to its production cost guidance for Malaysian estates at RM1,600/mt in FY03/14, and the higher production cost (relative to FY13’s of RM1,450/mt) is due mainly to inflationary wage increase and lower PK credit (arising from lower PK price).

Forecasts

We are cutting FY03/14 net profit forecasts by 7.6% to RM88.2m, largely to account for higher production cost assumption. No change in our FY15 net profit forecasts.

Catalysts (downside)

• Higher-than-expected soybean yield, resulting in lower soybean prices;
• India imposes higher 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; and
• Weather uncertainties revisit, resulting in supply distortion, hence boosting edible oil prices including CPO.

Rating

SELL

Negative – (1) Weak near-term sector outlook; and (2) Unattractive valuation.

Positives – (1) Strong FFB contribution from Indonesia post FY03/13; and (2) Strong balance sheet.

Valuation

We are maintaining our TP of RM2.48 (based on 15x FY15 EPS of 16.5 sen) and SELL recommendation on the stock.

Source: Hong Leong Investment Bank Research - 19 Sep 2013