Journey to Wealth
Plantation Sector - CPO touches RM3,500/tonne OVERWEIGHT
- CPO price for April delivery rose RM30/tonne toRM3,512/tonne yesterday and that for June delivery closed RM22/tonne higher atRM3,481/tonne.
- The rise in CPO prices was underpinned by expectationsthat soybean production in South America would be weak. Oil World has forecastworld soybean output to decline 8.1% to 242.9mil tonnes in 2011/2012F due tothe unfavourable weather in South America.
- Also according to independent cargo surveyors, palm oilexports from Malaysia rose 6.6% to 7.7% in the first 25 days of March comparedto the same period in February.
- According to Bloomberg, the average CPO price was at RM3,236/tonne year-to-date. Consensusis assuming an average CPO price of RM3,200/tonne to RM3,400/tonne for this year,while we have an average CPO price assumption of RM3,300/tonne for Malaysian plantationcompanies.
- We believe that pure plantation companies would benefitfrom the improvement in CPO prices compared to the integrated ones.
- For companies like IOI Corporation and Kuala LumpurKepong, we estimate that their net profit would improve by between 2% and 3%for every RM100/tonne increase in CPO price.
- For the purer ones like IJM Plantations and THPlantations, net profit would rise 4% to 7% for every RM100/tonne expansion inCPO price.
- In Indonesia, the upstream players are expected to recordlower CPO prices compared to their counterparts in Malaysia. This is due tohigher infrastructure costs and effects of the export tax structure inIndonesia.
- In spite of this, the price differential between CPO inMalaysia and Indonesia has narrowed from RM600-700/tonne last year toRM300-400/tonne early this year.
- It remains to be seen if the price differential wouldcontinue to decline especially during the peak output season in 2H of the year.A reason why the CPO price differential between Malaysia and Indonesia has narrowedis because palm oil is going through a low output season currently.
- We remain positive on the plantation sector. We believethat CPO prices would remain resilient, supported by slower growth of palm oilsupply in Malaysia and Indonesia and lower soybean production in South America.
Source: AmeSecurities
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