Highlights

We believe CPO price will unlikely achieve our average price projection of RM2,700/mt for 2014 due to: (1) Slower-thanexpected biodiesel implementation in both Malaysia and Indonesia; (2) Expected record soybean and corn crops in the USA, which will curb soybean oil prices from rebounding extensively, hence capping the upside potential of CPO prices; and (3) Exports to China unlikely grow further, which will curb Chinese demand for palm oil in the near term.

Moving into 2015, we believe CPO price will likely average lower than 2014, underpinned by the absence of major weather risk (at least in the near term).

Given the absence of near-term positive price catalyst, we lower out average CPO price projection in 2014 by RM300/mt to RM2,400/mt. Given the lower risk of El Niño’s impact to palm supply, we lower our 2015 average CPO price by RM400/mt to RM2,300/mt.

Following the downward adjustment in our average CPO price projections, we lowered our FY14-16 net profit forecasts for plantation companies under our coverage by 1.8-24.7%.

Post earnings forecasts and roll-forward of valuation base year, our target prices were revised downwards by 0.6-21.8% (with the exception of CBIP, which was raised marginally due to the roll-forward of valuation base year).

With the exception of Genting Plantations (which was downgraded from Buy to Hold and KLK (which was downgraded from Hold to Sell in our recent earnings evaluation), recommendation for all other stocks remains unchanged.

Catalysts

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

• Weather uncertainties revisit, resulting in world major edible oil supply distortion, hence boosting prices of edible oil (including palm oil); and
• Lower-than-expected soybean yield and soybean planting, resulting in higher soybean prices, hence prices of CPO

Rating

UNDERWEIGHT

Negatives – (1) Weak demand and price outlook; and (2) Pricey valuations (in particularly, post earnings downgrade)

Positive – Long term sector outlook remains favourable

Sector View

Sector rating downgraded from Neutral to Underweight.

Source: Hong Leong Investment Bank Research - 25 Aug 2014