We attended the Palm Oil Trade Fair and Seminar 2014 (POTS) and returned feeling neutral on the sector. On the positive side, average CPO prices estimate from POTS speakers of RM2,400 is higher than current spot prices of RM2,195/MT with the most bullish estimate from Mr. Dorab Mistry predicting that CPO prices should gradually increase to RM2,500 by March-2015. He believes that CPO demand is likely to stay strong due to the food segment while production is likely to be impacted by dry season. However, we believe that current share prices of planters have generally priced in the recovery of CPO prices to average of RM2,500/MT in 2015. Maintain NEUTRAL on the sector with CPO prices assumption of RM2,500/MT unchanged for CY14 and CY15. Our only OUTPERFORM call is SIME (TP: RM10.10) due to potential spin-off for its non-plantation divisions. We are upgrading IJMPLNT to MARKET PERFORM (from UNDERPERFORM) with unchanged TP of RM3.50 after the recent decline in share prices. Maintain MARKET PERFORM on IOICORP (TP: RM5.30), KLK (TP: RM23.80), FGV (TP: RM4.00), PPB (TP: RM15.00), TSH (RM2.27), TAANN (TP: RM4.55), UMCCA (TP: RM7.15) and CBIP (RM4.85). Maintain UNDERPERFORM on GENP (TP: RM9.55).

Average CPO prices of RM2400 from POTS 2014 speakers. Based on the three speakers who presented their CPO views during the conference, their forecasts range from RM2,100 to RM2,500 per MT. The average CPO price forecast is RM2,400 per MT in the near term and this is slightly lower than YTD CPO prices of RM2,465/MT but higher than current spot prices of RM2,195/MT. Most of the experts believe that CPO prices should recover as demand (from food segment) is likely to exceed production (affected by dry season) in 2014/2015 season.

Vote of confident from Dorab Mistry (Prediction: CPO prices to gradually increase to RM2,500 by March-2015). In the short-term (next few weeks), Mr. Dorab believes that CPO prices should trade around RM2,100 to RM2,300. After 10-Dec-2014, CPO prices should gradually increase to RM2,500 by March-2015. He estimated that global vegetable oil incremental demand of +4.50m MT is likely to exceed incremental supply of +3.95m MT for 2014/2015 season. Strong demand is supported by food segment (3.5m MT) and mandated biodiesel (1.0m MT). He explains that 80% to 90% of biodiesel demand is from mandated requirement hence he is not very concerned about the recent decline in crude oil prices. On the supply side, he explained that CPO production had peaked in Aug-2014 and new Low Cycle of production will start from Dec-2014 onwards. He highlighted that 2015 production may be affected by 1Q14 dry season in Malaysia and the current dry weather in Kalimantan, which has lasted for four months.

Lowest price prediction is from Dr. James Fry (Prediction: CPO prices to be capped at RM2,300/MT if Brent crude oil falls to USD85/barrel). Dr. James Fry believes that the major driver for all vegetable oil is crude oil prices. He estimated that the recent strength of CPO prices has taken its EU premium over Brent crude oil to USD100 and in Southeast Asia to USD40 per MT and this has made unsubsidised biodiesel unprofitable. However, he also sees that declining Malaysian palm oil stocks will likely support the CPO premium over Brent in the next six months.

Oil World’s Thomas Mielke is slightly bullish (Prediction: CPO prices to increase to RM2,300-RM2,500 range by Jan-Mar 2015). Mr Thomas estimated that global vegetable oil should see strong incremental demand of +6.3m MT for 14/15 season. This is due to the food segment benefitting from population and income growth. Incremental production for 14/15 season likely to slow to 4.7m MT as palm oil growth should slow down to 5-year low of +2.0m MT only. Overall, global vegetable oil inventory should decline by 1.8% to 21.98m MT.

We are more bullish at RM2,500/MT average for 2015. We maintain our average CPO prices of RM2,500/MT unchanged for CY14 and CY15 possibly due to our lower inventory estimate by end-2015 in which we think should decline all the way to a critical level of 1.5m MT. We believe that the supply issue has been underestimated as Aug-2014 peak production is unlikely to be repeated in the next 6 to 12 months. Additionally, we believe that 4Q14 production is likely to unexpectedly decline QoQ (against past pattern of increase QoQ) and we think that market has yet to price this in. On the demand side, we concur with Mr. Dorab Mistry and Mr. Thomas Mielke that palm oil demand is likely to stay strong due to support from the food segment. However, we are maintaining our NEUTRAL call on the sector as we believe that current share prices for planters are already reflecting CPO prices recovery to RM2,500/MT in 2015.

SIME (TP: RM10.10) is our top pick. We like SIME as we think its valuation should rerate higher due to potential spin off exercise within SIME business divisions. As it is, it has been reported by media quoting Tan Sri Mohd Bakke Salleh (SIME’s CEO) specifying that the listing of its motor unit is set to be executed in 1HCY15 subject to market conditions. The stock is also cum dividend of 30.0 sen (subject to approval in the AGM on 13-Nov-2014).

Source: Kenanga