Highlights

There have been several sizeable plantation landbank transactions in Sabah since Jul-13 (see Figure 1) amidst current depressed CPO price environment. The most recent two major transactions (by Boustead and IOI) have set a pricing benchmark of circa RM75,000/ha for plantation landbank in Sabah.

We believe the recent increase in M&A activities among the larger-scale plantation players could be due to: (1) Their efforts to achieve better economies of scale through sizing up landbanks given their strong financial footings; and (2) The limited downside to current CPO prices (thanks to the economic viability of biodiesel) and the sector’s favourable longer term demand outlook on the back of population growth and scarcity of arable land for oil palm plantations.

While it is difficult to pinpoint the next takeover target(s), we list down the relatively smaller plantation companies which have low EV/ha (<RM60,000/ha) as well as the location of majority of their plantation landbank in Malaysia (see Figure 2), as these are the likely takeover targets by the larger plantation players.

Valuations (EV/ha) aside, we are holding to our Underweight stance on the sector due to: (1) Seasonally higher CPO production (which has already started since Jul); (2) The depreciation of Rupee against RM and Rupiah may hurt demand for CPO from India (one of the world’s largest palm oil consuming countries); and (3) Palm oil consumption growth in China will likely taper off on the back of the absence of seasonal demand.

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.
• 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; and (2) Impending excess supply of CPO.

Positive – CPO is still relatively cheaper than soybean oil.

Top picks 

For exposure in the sector, our top picks are and CBIP (BUY; TP: RM3.42) and Genting Plantations (HOLD; TP: RM10.17).

Source: Hong Leong Investment Bank Research - 7 Oct 2013