We maintain our OVERWEIGHT call for the plantation sector as the market expectation of El Nino in 2H14 should keep share prices buoyant. Even without El Nino, the short-term outlook for the sector is good as we expect the upcoming 2QCY14 result to register minimum 15% growth YoY premised on 11% gain YoY in CPO prices and better CPO production (+17% YoY). While we do expect June palm oil inventory to gain 5% to 1.93m MT, the downside in CPO prices should be limited to RM2350/MT as this is the level where we expect biodiesel producers in Indonesia to be profitable. Lastly, most planters managed to register good earnings growth in 1Q14 and 70% of them meet consensus earnings target. Our top pick for the sector are KLK (TP: RM27.00) and TSH (TP: RM4.10). We like KLK due to its laggard status among big cap planters and good earnings growth of 42% expected for FY14 at RM1.30b. TSH is retained as our Top Pick 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%). We also have OUTPERFORM calls on IOICORP (TP: RM5.40), UMCCA (TP: RM7.65), TAANN (TP: RM5.00) and CBIP (TP: RM4.90). Maintain MARKET PERFORM for SIME (TP: RM10.00), PPB (OP; TP: RM16.55) and FGV (TP: RM4.75). Maintain UNDERPERFORM on GENP (TP: RM10.85) due to its excessive valuation.
1Q14 result mostly within expectations with seven in line, one above and two below. On the positive side, IOICORP’s earnings beat consensus possibly due to better-than-expected downstream division margins, which improved significantly from 5.2% in 9M13 to 7.7% in 9M14. This could be due to better performance in the “specialty oils and fats” (SOAF) and “oleochemicals” (OLEO) sub-segment as the global economy improved. However, SIME’s earnings missed consensus estimate due to lower-than-expected FFB volume, which has declined 12% in 9M14. PPB’s net profit was also below expectation due to poor result seen in Wilmar earnings. The performances of KLK, FGV, GENP, IJMP, TSH, TAANN, CBIP were on par with consensus.
Expectation of El Nino in 2H14 to keep share prices buoyant. In its latest forecast published on 17 June 2014, the Australian Bureau Of Meteorology’s (ABM) ENSO Tracker remains at El Niño ALERT, indicating at least a 70% chance of El Niño developing in 2014. In our view, the El Nino warning from scientists is likely to be taken seriously by the financial market and hence should support share prices of planters. We gather that 2015 CPO production is likely to be impacted should moderate or severe El Nino occurs in 2H14 and this is positive to CPO prices.
Positive outlook for plantation sector even without El Nino. We expect the news flow to be positive in 3Q14 as we expect good earnings growth of at least 15% YoY during 2Q14 earnings announcement in August. Note that average CPO prices of RM2583/MT so far in 2Q14 is 11% higher YoY against 2Q13’s RM2323/MT. Additionally, we also gather that CPO production is growing significantly YoY as Malaysian CPO production grew by 17% YoY to 3.21m MT in the period of April and May. In our view, the continuous earnings growth should continue to sustain plantation companies’ share prices.
Slow inventory rise is not a major concern. We do expect Jun-14 inventory to rise by 5% to 1.93m mt as total supply of 1.72m MT should outpace total demand of 1.63m mt. Despite the higher inventory expected, the downside in CPO prices should be limited to RM2350/MT (assuming Brent Crude Oil prices of USD110/barrel) as this is the level of where we expect biodiesel producers in Indonesia to be profitable. This should naturally spur discretionary demand in Indonesia and prevent further fall in CPO prices.
Maintain OVERWEIGHT with KLK (TP: RM27.00) and TSH (TP: RM4.10) as our TOP PICKS. We have switched our Top Pick preference to KLK (previously IOICORP) as the latter’s upside is now less against KLK. We like KLK due to its laggard status among big cap planters and robust earnings growth of 42% expected for FY14 at RM1.30b. Additionally, KLK is now the only big cap and non-GLC Malaysian listed planter which is expected to remain Shariah-compliant for the foreseeable future. TSH is retained as our Top Pick 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%). Recall that its 1Q14 FFB output growth of 22% YoY to 156,742 MT is the strongest among planters under our coverage.
Source: Kenanga
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