Highlights

CPO rallies above RM2,700/mt. CPO futures (3-mth) continued to rally for 7th consecutive trading days and closed at RM2,755/mt (higher than our projected average CPO price of RM2,700/mt for 2014), on several positive news flows, including stronger CPO exports from Malaysia and concerns on weather.

Assuming the recent price upswing sustains, pure upstream plantation players will benefit the most from the recent CPO price upswing, given their high earnings sensitivity to CPO price movement (see Figure 1).

Maintain 2014-2015 average CPO price projection. YTD, spot CPO price averaged at RM2,565/mt vis-à-vis our projected average CPO price of RM2,700/mt for 2014. Thus, this is somewhat within our expectation. We are sticking to our average CPO price projection of RM2,700/mt for 2014 and 2015, and we still believe it is unlikely for CPO price to run-up further from current level, as: (1) Biodiesel policy alone is insufficient to boost CPO price higher (unless Brent crude price advances further); and (2) The price attractiveness of CPO over soyoil has diminished over the last few months (see Figure 2)

Nevertheless, in the short-term, the bullish CPO futures could overshoot on the upside, resulting in trading opportunity which we believe focus should be on plantation stocks with liquidity (see Figure 3 for plantation stocks with high liquidity) rather than based on pure upstream players as volume plays an important role in such trading scenario.

Maintain our Neutral stance on the sector.

Catalysts

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Timely implementation of higher biodiesel mandate in Indonesia and Malaysia.
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.

Rating

NEUTRAL

Positive – (1) Improved demand outlook; and (2) Better production cost visibility.

Negatives – (1) Price attractive of CPO diminishes; and (2) Pricey valuations for the sector.

Top picks

For longer-term exposure in the sector, our top picks are Genting Plant (BUY; TP: RM12.20) and TSH Resources (BUY; TP: RM3.28).

Source: Hong Leong Investment Bank Research - 21 Feb 2014