In the latest 4QCY13 reporting season, the plantation sector has outperformed with 50% of stocks under our coverage beating consensus estimate. We believe this is just the beginning of more potential earnings outperformance as CPO prices is currently trading close to RM2800/mt which is higher than consensus estimate of RM2700/mt. Hence, we are positive on the planters’ next quarter earnings prospects and also possibly throughout 2014. Additionally, prices for the forward 3-month CPO futures continued to stay above RM2700/mt in the past two weeks and it closed at RM2806/mt yesterday. Overall we are still bullish on CPO prices as we expect sustained inventory downtrend through 1Q14 to hit 1.67m mt by end-March. Lastly, we believe CPO prices are supported indirectly by concerns over the Ukraine crisis and the deteriorating outlook for Brazilian soybean production.
Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecast of RM2,800/mt unchanged. Our top picks are IOICORP (OP; TP: RM5.15) and TSH (OP; TP: RM4.10). We also have OUTPERFORM calls on SIME (TP: RM10.00), KLK (TP: RM26.10), PPB (TP: RM17.00), IJMP (TP: RM3.80), TAANN (TP: RM5.00) and CBIP (TP: RM4.05). Maintain MARKET PERFORM on FGVH (TP: RM4.75), GENP (TP: RM10.85) and UMCCA (TP: RM7.50).
Sterling 4Q13 results. The plantation sector’s 4QCY13 earnings performance significantly outperformed as 50% of stocks under our coverage reported earnings, which beat consensus estimates while 40% managed to meet consensus estimate with only 10% underperforming. Post 4Q13 results, we have upgraded our Target Price for IOICORP (New TP: RM5.15 from RM4.95), TSH (New TP: RM4.10 from RM3.38), IJMP (New TP: RM3.80 from RM3.25) and GENP (New TP: RM10.85 from RM10.00) due to better cost management. We have also increased CBIP TP to RM4.05 from RM3.18 after applying a higher Fwd. PE valuation. However, we have trimmed our TP for SIME slightly to RM10.00 (from RM10.30) due to lower than expected FFB volume in 1HFY14.
And the best is yet to come... We believe the trend of earnings outperformance has just started as CPO prices are now trading close to RM2800/mt which is higher than consensus estimate of RM2700/mt. Hence, we are positive on the earnings outlook for planters in the next quarter and also throughout 2014.
CPO prices on track to hit RM2900 by end-March 2014. Recently, the CPO forward 3-month futures contract surged above RM2800/mt and we expect it to stay strong and gradually increase to RM2900 by end-March. This is based on our view that the market is experiencing strong and sustained inventory down trend throughout 1Q14 and we expect inventory level to hit 1.80m mt for end-Feb before declining further to 1.67m mt by end-Mar. We believe that the new demand support has emerged this year due to the strong implementation of biodiesel policy in Indonesia. On the supply side, the tree stress impact is expected to keep production growth limited in the near-term.
CPO prices to benefit indirectly from the Ukraine crisis. Since end-Feb, the Ukraine crisis has escalated with potential Russian intervention in the country. As a result, Brent crude oil price has surged to above USD110 per barrel. We believe that CPO prices have benefited indirectly from this as demand from the biodiesel segment will increase in line with higher Brent crude oil prices.
Soybean production outlook has declined significantly. According to the latest Oil World report, Brazil soybean crop prospects have further deteriorated, primarily in Parana and Mato Grosso. Accordingly, Oil World has downgraded its Brazilian soybean production estimate to 84.0m mt (against 85.0m mt last week and 89.5m mt on 24 Jan). This is positive to CPO prices as limited supply of soybean oil should lead to higher demand for CPO as both are commonly used as a mutual substitute.
Top Picks are IOICORP and TSH. 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 due to its high FFB growth. Recall that its FY13 FFB output growth of 28% YoY to 542,951 is the strongest among planters under our coverage.
Source: Kenanga