In his latest outlook on CPO prices, Dorab Mistry has predicted the possibility that CPO prices may touch RM3,000/mt by Mar-2014 if Brazil implements a higher biodiesel mandate. In the short term between Dec-2013 to Mar-2014, he expects CPO prices to increase higher with a predicted range of RM2600 to RM2900 per mt. We gather that his short term bullish view is premised on good biodiesel demand in Indonesia and poor CPO output currently in Indonesia. While we are bullish on CPO prices, we believe CPO prices should only increase to RM2,900/mt in the most optimistic scenario as soybean oil (“SBO”) will start to compete very aggressively with CPO at this level. Pending the latest MPOB data on 10-Dec-2013, we maintain our NEUTRAL call on the sector at this juncture with our current CY14 average CPO price forecast of RM2,700/mt unchanged. However, every RM100/mt increase in average CPO prices should increase the planters earnings in the range of 7%-15%. While we expect all planters to benefit from higher CPO prices, our top pick for the sector is TSH (OP; TP: RM3.18) as we expect it to benefit additionally from not only better CPO prices but also superior FFB volume growth (highest among planters under our coverage).

Bullish view on CPO prices from Dorab Mistry. In his latest outlook on CPO prices given during the 9th Indonesian Price Outlook Conference, Dorab Mistry has predicted the possibility that CPO prices may touch RM3,000/mt by Mar-2014 if Brazil implements a higher biodiesel mandate. In the short term between Dec-2013 to Mar-2014, he expects CPO prices to increase higher with a predicted range of RM2600 to RM2900 per mt. We gather that his short term bullish view is premised on good biodiesel demand in Indonesia and poor CPO output currently in Indonesia.

Overall, we agree with Mistry bullish view. On the good biodiesel demand in Indonesia, we have highlighted on 11-Sep-2013 that Indonesia local biodiesel demand may have surged as shown by significantly lower Malaysia palm oil import to a 5.5-year low in MPOB August data. As for the poor CPO output, we have highlighted on 15-Aug-2013 that palm trees are likely to be less productive in 2H13 as compared to 2H12 last year on lingering tree stress.

But we think CPO prices may be capped at RM2,900/mt. While we are bullish on CPO prices, we believe CPO prices should only increase to RM2,900/mt in the most optimistic scenario as soybean oil (“SBO”) will start to compete very aggressively with CPO at this level. Assuming SBO stays at the current level of 40.5 US cents per pound (or USD893/MT), it will then be at discount to palm oil when it reach RM2,900/mt (USD898/MT). Based on historical observation, CPO usually trades at discount to SBO and it may trade at premium to SBO only during serious unusual shortage of palm oil in the market. Even if CPO trade at premium to SBO, it will not sustain for a long period as consumers shift demand away from CPO.

Other reasons to be bullish on CPO prices. Additionally, we are bullish on CPO prices as demand may be boosted by: (i) United States Food and Drug Administration (USFDA) may ban artificial transfats in processed food in US by Jan-2014, (ii) weak Ringgit and (iii) potential increase in biodiesel mandate to B7 in Brazil (currently B5). We are watching these developments closely and may upgrade the sector to OVERWEIGHT pending the upcoming Nov-2013 MPOB data on 10-Dec.

Maintain NEUTRAL call on the sector at this juncture with our current CY13 average CPO price forecasts of RM2,400/mt (CY14: RM2,700/mt) unchanged. For big cap planters, most of their current market valuations have largely priced in CPO prices recovery to average RM2650-RM2700 per mt in 2014. However, every RM100/mt increase in average CPO prices should increase the planters earnings in the range of 7%-15%. While we expect all planters to benefit from higher CPO prices, our top pick for the sector is TSH (OP; TP: RM3.18) as we expect it to benefit additionally from not only better CPO.

Source: Kenanga