We are downgrading our call on the plantation sector to NEUTRAL with CY2014 average CPO price forecast reduced to RM2500/MT (previously RM2800/MT) mainly on lower soybean oil (SBO) prices estimate. We have lowered our estimate for average SBO prices to 37 US cents per pound (UScpp) from 42 UScpp previously in line with the decline in United States Department of Agriculture (USDA)’s assumption. Note that the lower SBO price is caused by higher soybean production in the US where production is projected at a record 3.80b bushels (or 17% higher than its Nov-2013 estimate). We have also increased our end-2014 Malaysia palm oil inventory by 2.7% to 1.64m MT. Lastly, the chance of El Nino happening has been reduced to 50% from 70% previously by Australia Bureau of Meteorology (ABM). Among the big caps, we have downgraded our call on both IOICORP (New TP: RM5.30; Old TP: RM5.40) and KLK (New TP: RM25.00; Old TP: RM27.00) to MARKET PERFORM from OUTPERFORM previously. Our big cap top pick now is SIME (New TP: RM10.35; Old TP: RM10.50) while TSH (New TP: RM4.00; Old TP: RM4.30) is retained as our mid cap top pick. We have also downgraded our call on TAANN (New TP: RM4.50; Old TP: RM5.00) and UMCCA (New TP: RM7.50; Old TP: RM7.65) to MARKET PERFORM from OUTPERFORM previously. Other calls are maintained with lower TP as follow: OUTPERFORM on CBIP (New TP: RM4.85; Old TP: RM4.90); MARKET PERFORM on PPB (New TP: RM15.00; Old TP: RM16.55), FGV (New TP: RM4.40; Old TP: RM4.75), and IJMP (New TP: RM3.75; Old TP: RM3.80). Maintain UNDERPERFORM on GENP (New TP: RM9.70; Old TP: RM11.20) due to its excessive valuation which is even higher than big-cap planters.
2014 average CPO prices cut by 10% to RM2500/MT from RM2800/MT previously mainly on lower SBO prices assumption. We have lowered our estimate for average SBO price to 37 UScpp from 42 UScpp previously in line with the revision by the United States Department of Agriculture’s SBO prices assumption. Note that the lower SBO price is caused by higher soybean production in the US where production is projected at a record 3.80b bushels (or 17% higher than its Nov-2013 estimate). We believe that higher acreage for soybean and favourable weather in the US are contributary factors. We also introduce our 2015 average CPO price forecast of RM2500/MT.
End-2014 Malaysia palm oil inventory revised up by 2.7% to 1.64m MT (from 1.60m MT previously). This was mainly due to higher palm oil import (POI) assumption at 288,000 MT from 240,000 MT previously as a result of slower-than-expected Indonesia biodiesel consumption. Recall that our Indonesia Biodiesel Tracker is based on MPOB data of POI as Indonesia's palm oil statistics is hard to come by. We believe that the higher-than-expected POI in 1H14 is a sign that Indonesia’s biodiesel consumption is lower than expected possibly due to high CPO prices in 1Q14, which have resulted in slow consumption of biodiesel in 2Q14. Overall, this means limited upside for CPO prices.
July-14 inventory estimate revised up to 1.65m MT or flattish inventory MoM. We have increased our July-14 inventory estimate to 1.65m MT from 1.53m MT previously after assuming falling palm oil export of 2% MoM from a 6% increase MoM. We believe that palm oil lost its competitiveness against SBO in July-14 as SBO price has declined significantly by 7% to 36.11 UScpp. On a MoM basis, the trend is expected to be flattish and hence resulting in neutral impact to CPO prices.
Only 50% chance of El Nino happening now from 70% previously. We gather that Australia Bureau of Meteorology (ABM) has downgraded its status for El Nino to “WATCH” from “ALERT” previously. In the ABM latest issue released on 29th July, ABM mentioned that “the chance of El Niño developing in 2014 is approximately 50%, which remains significant at double the normal likelihood of an event”. Overall, this could mean limited upside for CPO prices as there is now less risk seen for a significant decline in palm oil production next year in line with lower probability for El Nino in 2H14.
Sector downgraded to NEUTRAL; IOICORP and KLK are downgraded to MARKET PERFORM. Among the big caps, we have downgraded our call on both IOICORP (New TP: RM5.30; Old TP: RM5.40) and KLK (New TP: RM25.00; Old TP: RM27.00) to MARKET PERFORM from OUTPERFORM previously. While we believe that 1HCY14 earnings growth should be healthy, we expect the earnings growth momentum to slow down considerably in 2HCY14 due to low CPO prices currently. Our big cap top pick has now been shifted to SIME (New TP: RM10.35; Old TP: RM10.50) as we believe SIME’s valuation should rerate higher due to potential demerger exercise in the Group. TSH (New TP: RM4.00; Old TP: RM4.30) is retained as our mid cap top pick due to its superior FFB growth of 18% in FY14E (against peers’ average of 10%).
But the sector is not downgraded all the way to UNDERWEIGHT for five reasons; (i) upcoming 2QCY14 results likely to meet consensus estimates, (ii) liquidity is still ample in the local Malaysia market, (iii) Shariah funds likely to stay invested in big cap planters, (iv) overall flattish share price performance YTD means downside risk is limited, and (v) valuation from Standard Deviation (SD) angle (as per Historical Fwd. PER Band) is still not excessive.
2014 average CPO prices cut by 10% to RM2500/MT from RM2800/MT previously.
CPO prices adjusted down due to lower soybean oil assumption. We are reducing our 2014 average CPO prices to RM2500/MT after assuming lower average SBO prices of 37 UScpp from 42 UScpp previously. This is in line with the lowering of USDA’s SBO prices assumption. In the latest USDA’s World Agricultural Supply and Demand (WASDE) report on 11 July 2014, USDA projection for SBO prices are in the range of 36 to 40 cents per pound. This is lower than its previous projection on 8 Nov 2013 which estimated SBO prices of 40 to 44 cents per pound. Note that the lower SBO price is caused by higher soybean production globally with US taking the lead. According to USDA, US soybean production is projected at a record 3.80b bushels (or 17% higher than its Nov-2013 estimate of 3.26b bushels). We believe that higher acreage for soybean and favourable weather in US are contributary factors.
For 2015, we introduced our average CPO prices of RM2500/MT based on the assumptions of: (i) average SBO prices of 40 UScpp, (ii) USD Index Estimate of 85.3, (iii) Malaysia palm oil inventory of 1.50m MT, and (iv) average Brent Oil Price of USD105.0 per barrel. Note that we have changed our model slightly to use the new variable of USD Index in order to align CPO prices estimate to global USD movement (instead of USDMYR previously which only reflect USD movement against Ringgit). As a result, our model will work out the CPO prices in USD/MT first before translating it into RM/MT.
Source: Kenanga
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