We returned from the MPOB Palm Oil Economic Review & Outlook Seminar 2015 feeling lukewarm on the near-term prospects of the Malaysian palm oil industry. At the seminar, the MPOB announced that the 2014 average CPO price was RM2,384/MT; within ours and consensus expectations of RM2,400/MT. Despite strong CPO performance in 1H14 due to expectations of production disruption, CPO prices weakened in 2H14 on record high soy production and a sharp drop in crude oil prices. Going forward, we expect limited near-term catalysts as we gather that a possible weak El Nino and lackluster biodiesel demand would limit immediate CPO price upside. In 2015, MPOB expects CPO prices to average RM2,290/MT with volatile trading between RM1,820/MT to RM2,750/MT due to uncertainties on production, crude oil and exchange rates. We concur as we expect 2H15 CPO prices to weaken on production recovery as well. We maintain our NEUTRAL call on plantations with SIME (OP; TP: RM9.92) as our Top Pick on the expectation of news-flow related to its auto division IPO. Maintain MARKET PERFORM on KLK (TP: RM21.50), PPB (TP: RM15.26), FGV (TP: RM2.30), IJMP (TP: RM3.30), TSH (TP: RM2.18), TAANN (TP: RM3.70), UMCCA (TP: RM6.68), and CBIP (TP: RM2.05); and maintain UNDERPERFORM on IOICORP (TP: RM4.40) and GENP (TP: RM9.20).

2014 average CPO price of RM2,384/MT within expectations. We attended the MPOB Palm Oil Economic Review & Outlook Seminar 2015, themed “Palm Oil: Continuing to Deliver Export Growth Amidst Challenges”. The event was well attended by more than 300 participants from diversified backgrounds in the palm oil industry. During the seminar, MPOB Director General Datuk Dr. Choo Yuen May announced that the average CPO price in 2014 was RM2,384/MT, which was within expectations, at 99% of both ours, and consensus estimates, of RM2,400/MT. This was despite the strong CPO price performance earlier in Mar-14 reaching a high of RM2,855/MT on expectation of production disruptions. However, record high soybean crop productions and declining crude oil prices resulted in CPO price declining to a low of RM2,055/MT in Sep-14. Hence we reiterate our view that 4Q14 earnings are likely to disappoint as 4Q14 average CPO price at RM2,194/MT trailed the full-year average.

Unlikely to see CPO price catalysts from weather and biofuel demand. We gather from the various speakers that CPO prices are not expected to see a boost in 2015 from a weak El Nino, while biofuel demand should wane in the near-term. According to speaker Mr A.H. Ling (Director of Gangling Sdn. Bhd.), while there is still a possibility of a weak El Nino event in 1H15, historically such events have had little impact on CPO prices as subsequent production tends to be just slightly below average. Meanwhile, based on comments from speakers Dr. Joseph Feyertag (Economist, LMC International Ltd.) and Dr. Fadhil Hasan (Executive Director of the Indonesian Palm Oil Association), we think that biofuel demand is likely to slow in the near-term as the growing premium between vegetable oils and crude oil prices makes alternative fuels, including palm oil, less attractive. This was seen in Indonesia with 2014 domestic consumption of biodiesel at 1.57m MT despite a consumption target of 3.40m MT. Overall, we think that the lack of immediate catalysts should limit CPO price upside for now.

Expecting 2015 CPO price of RM2,290/MT, with range of RM1,820/MT to RM2,750/MT. During the seminar, MPOB also announced their CPO price forecast with a base-case scenario forecast of RM2,290/MT. The MPOB forecast of RM2,290/MT matches expectations, at 102% of consensus (RM2,253/MT) and 104% of our estimate (RM2,200/MT). MPOB also provided an expected trading range forecast between RM1,820-RM2,750/MT based on positive/negative scenarios for closing stocks, exports, soybean oil price and crude oil prices. They also added that CPO prices are expected to be volatile in 1H15 due to uncertainties on production, crude oil and exchange rates. We agree on this assessment and also like to highlight that despite current CPO prices of RM2,304/MT, we believe that CPO prices are likely to soften in 2H15 due to recovery in production as well as the effects of deteriorating crude oil prices and strengthening USD.

Maintain NEUTRAL on plantations with SIME (OP, TP: RM9.92) as our Top Pick. Despite potentially weaker CPO prices, we reiterate our NEUTRAL stance on the plantations sector as we think the sector should remain relatively resilient due to the high number of big cap planters and scarcity of Shariah-compliant counters. We retain our sole OUTPERFORM call on SIME on the expectation of news-flow related to its auto division IPO, which should surpass the corporate earnings impact from potentially softer plantations results.

Source: Kenanga