We attended the MPOB seminar themed “Palm Oil Economic Review and Outlook Seminar 2014” and returned feeling more optimistic on CPO prices. Key takeaways from the seminar are: (i) average CPO price for 2013 was at RM2371/mt and broadly within consensus expectation, (ii) end-2014 stocks level expected to decline to the range of 1.6m to 1.8m mt (from end-2013 level of 1.99m mt), and (iii) Indonesia’s PERTAMINA absorption of domestic produced palm oil biodiesel has surged 25% YoY in 2013 to 0.9m-1.0m mt.

As all these factors are bullish to CPO prices, we maintain our OVERWEIGHT call on the sector and CY14 average CPO price forecasts of RM2,800/mt. Our top picks are IOICORP (OP; TP: RM4.95) and TSH (TP: RM3.38). Other OUTPERFORMs include SIME (TP: RM10.30), KLK (TP: RM26.10), PPB (TP: RM16.60), TAANN (TP: RM5.00) and CBIP (TP: RM3.60). Maintain MARKET PERFORM on FGVH (TP: RM4.75), IJMP (TP: RM3.62) and UMCCA (TP: RM7.50). Maintain UNDERPERFORM on GENP (TP: RM10.00) due to its excessive valuation which is even higher than big cap planters.

Average CPO price is broadly within expectations in 2013, better outlook in 2014. We attended MPOB seminar under the theme “Palm Oil Economic Review and Outlook Seminar 2014”. The event was well attended by about 200 participants from diversified backgrounds in the palm oil industry. In the seminar, MPOB announced that the average CPO price in 2013 was at RM2371/mt and this is broadly within expectation, at 95% of consensus estimate of RM2500/mt. However, it makes up 99% of our forecast of RM2400/mt. Although the full-year average is 14% lower YoY against 2012 average of RM2764/mt, the monthly trend throughout 2013 is positive with CPO prices recovering from RM2221/mt in Jan-2013 to RM2575/mt in Dec-2013. While there are no CPO prices forecast provided during the seminar, we believe that CPO prices should increase to an average of RM2800/mt in 2014 as we expect strong biodiesel demand from Indonesia and lower inventory in Malaysia by end-2014 coupled with our view that soybean oil prices should have bottomed.

End-2014 stocks level expected to decline further. In the presentation by Datuk Dr. Choo Yuen May (Director General of MPOB), she mentioned that Malaysia’s inventory is expected to decline to the range of 1.6m to 1.8m by end-2014. This is supported by expectation of strong export demand and increased usage for biodiesel and flattish production at 19.5m mt (+1.5% YoY). We generally concur with Dr. Choo although we are more bullish as our estimate of 1.60m mt inventory by end-2014 is at the lowest end of MPOB estimate as we foresee strong biodiesel demand from Indonesia to significantly decrease palm oil import (POI) into Malaysia in 2014. Overall, the lower inventory expectation is bullish to CPO prices.

Indonesia biodiesel consumption surged in 2013. We gather from Prof. Dr. E. Gumbira Sa’id (Professor in Agroindustrial Technology and Chairman of Indonesian Oil Palm Society) that APROBI has reported that PERTAMINA absorption of domestic produced palm oil biodiesel has surged 25% YoY in 2013 to 0.9m-1.0m mt. We view this positively as it strengthens our view that Indonesia is committed and serious about its implementation of biodiesel policy. As more than 90% of POI into Malaysia originated from Indonesia, we believe that the latest MPOB data showing significantly lower POI at 24,574 mt (-72% YoY) should be the clearest sign that Indonesia biodiesel implementation has curbed the export of palm oil. Hence, this is another bullish sign of sustainable demand resulting from Indonesia’s biodiesel industry.

Maintain OVERWEIGHT with IOICORP (TP: RM4.95) and TSH (TP: RM3.38) as our TOP PICKS. We believe IOICORP’s valuation should rerate higher post its demerger exercise with IOI Properties as it emerged as the biggest and most efficient integrated palm oil players. Note that IOICORP’s FFB yield at 24.46mt per ha is also the highest among big cap planters. As for mid cap Top Pick, we like TSH, which should benefit from higher CPO prices YoY due to its high FFB growth.

Source: Kenanga