We attended the Malaysia Palm Oil Council (MPOC) seminar themed “El Nino – Effects and Implications” and returned feeling more optimistic about CPO prices. Key takeaways from the seminar are: (i) El Nino is most likely to occur beginning June-August 2014 and may last until 2015 but the strength is still unknown, (ii) there is strong indication of an El Nino emerging in mid-2014 and this will provide a catalyst for supply disruption and CPO price spike in 2014/15, and (iii) observation in the latest El Nino episode in 2009/10 shows that CPO prices surged 70% to peak at RM3962/MT in Feb-2011. As all these factors are bullish to CPO prices in the long-term, 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: RM5.40) and TSH (TP: RM4.10). Other OUTPERFORMs include KLK (TP: RM27.00), TAANN (TP: RM5.00) and CBIP (TP: RM4.80). Maintain MARKET PERFORM on SIME (TP: RM10.00), PPB (TP: RM16.55), FGV (TP: RM4.75), IJMP (TP: RM3.80) and UMCCA (TP: RM7.50). Maintain UNDERPERFORM on GENP (TP: RM10.85) due to its excessive valuation which is even higher than the big cap planters.
High chances of El Nino in 2H14. We attended MPOC seminar under the theme “El Nino – Effects and Implications” on 5-Jun-2014. The event was well attended by about 100 participants from diversified backgrounds in the palm oil industry. In the seminar, two speakers presented their view on the weather and its impact on palm oil production.
El Nino is bullish to CPO prices. The first speaker is Mr. Jailan Simon (Director of National Climate Centre of MetMalaysia) who has 20 years of work experience in MetMalaysia. He mentioned that El Nino is most likely to occur beginning June-August 2014 and may last until 2015. However, the strength is still unknown. The second speaker is Mr. Ling Ah Hong (Director and Principal Consultant of Ganling Sdn. Bhd.) who has 35 years of experience in research and management of plantation crops and companies. According to him, there is strong indication of an El Nino to emerge in mid-2014 and this will provide a catalyst for supply disruption and CPO price spike in 2014/15. Based on his observation in the latest El Nino episode in 2009/10, CPO prices surged 70% to peak at RM3962/MT in Feb-2011.
We believe CPO should surge above RM3000/MT if El Nino materialise. We maintain our CPO prices assumption of RM2800/MT for 2014 assuming normal weather pending the actual occurrence of El Nino (if it indeed happens). However, our model shows that CPO prices could surge above RM3000/MT in 2015 assuming a 5% drop in Malaysia CPO production in 2015. Our assumption of 5% drop is considered conservative as compared to Mr. Ling’s observation of the drop between 6.1% and 23.1% in the past 5 El Nino episodes since 1992. Under such situation, Malaysia palm oil inventory could easily be reduced below 1.50m MT which is a critical psychological level to as low as 1.33m MT in 2015. Historically, this scenario is possible in which inventory was drawn down to 1.42m MT in Jan-2011 with average CPO prices of RM3769/MT at that time.
Outlook for plantation is good even without El Nino. Our observation shows that 2Q14 earnings for plantation companies should still register good earnings growth. As average CPO prices of RM2644/MT so far in 2Q14 is 14% higher YoY against 2Q13’s RM2323/MT, our rough estimation shows that 2Q14 earnings is likely to grow at least 15% YoY. In our view, the continuous earnings growth should continue to support plantation companies’ share prices.
Maintain OVERWEIGHT with IOICORP (TP: RM5.40) and TSH (TP: RM4.10) as our TOP PICKS. We believe IOICORP’s upstream plantation should generate better earnings in FY15 due to better CPO prices YoY. Additionally, its downstream division is benefiting from economy recovery in Europe and US due to its expertise in oleochemicals and specialty oils. Lastly should El Nino occur, we reckon that IOICORP will be the mostly watched stocks by foreign investors due to large market cap and high trading liquidity of the stocks. We continue to like TSH due to its trees’ young age profile of about 6.5 years and superior FFB growth of 18% in FY14E (against peers’ average of 10%). Should El Nino occur, TSH will also benefit the most as its FFB growth should still be the highest among its peers due to the structural advantage of being young.
Source: Kenanga
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