We attended the biennial MPOB’s International Palm Oil Congress and Exhibition 2015 (PIPOC2015) and came away with our neutral short-term view as well as improving mid-long-term outlook intact. We gather that CPO prices could hit USD600/MT in 1Q16 on tightening supply, but we expect prices to subsequently soften on seasonal production improvement and ample supply of competing oils. Meanwhile, biodiesel mandates and crude oil prices remain critical to support CPO prices, and we reiterate our expected floor price of RM2,100/MT based on +1.0SD rolling CPO-gasoil price premium. Goals of the new Malaysian-Indonesian industry collaboration were outlined, including price stabilization, harmonizing standards, R&D collaboration and facilitating the planned Green Economic Zone in Indonesia. Other potential talks centered on export duties and oleochemical policies that could benefit downstream players. However, despite a positive long-term outlook, we keep our NEUTRAL call on plantation sector as we expect negative short-term newsflow (range-bound CPO prices, high stocks and potential soft 3Q15) to cut short the recent rally. Investors should consider Selling-On-Strength. TAANN (OP; TP: RM4.80) is our Top Pick due to possible timber segment upside and solid dividend yield (5.3%). Maintain OUTPERFORM on TAANN (TP: RM4.80) and CBIP (TP: RM2.13), MARKET PERFORM on SIME (TP: RM8.30), IOICORP (TP: RM4.36), KLK (TP: RM21.80), PPB (TP: RM16.92), IJMPLNT (TP: RM3.50), TSH (TP: RM1.95), and UMCCA (TP: RM6.30), and UNDERPERFORM on FGV (TP: RM1.30) and GENP (TP: RM9.50).

Attended PIPOC2015. We attended the biennial MPOB International Palm Oil Congress and Exhibition 2015 (PIPOC2015) at the Kuala Lumpur Convention Centre which was held over the last three days. PIPOC2015 is one of the major industry events and was well attended by thousands of participants from the oils and fats industry around the world. We came away from the event with our neutral short-term outlook unchanged, while the mid-to-long-term CPO price outlook seems to be improving, as expected. The following outline our key takeaways from the conference.

CPO price could hit USD600/MT in 1Q16. According to speaker Dr James Fry (Chairman, LMC International), CPO prices are likely to be on an uptrend, potentially reaching USD600/MT (c.RM2,540/MT) by end-1Q16. This is excluding potential El Nino impact, as on-going droughts and less fertilisation activity will lead to declining production early next year and therefore tightens supply. While we agree that 1Q16 is likely to see stronger CPO prices due to the above reasons, we think prices are likely to decline later in the year on seasonal production trends and ample supply of competing soybean oil (SBO), to average RM2,400/MT for the full-year.

Key driver is biodiesel. During his talk, Dr Fry also stressed the importance of mandated biodiesel production to support CPO prices going forward. He also talked on crude oil’s role as a price floor for CPO prices due to the use of CPO as an alternative fuel. We concur, since after the near-disappearance of discretionary biodiesel blending, it now falls to subsidised biodiesel to absorb excess palm oil stocks. As outlined in our recent 4Q15 sector outlook, we expect short-term CPO prices to be supported by gasoil prices with a floor of RM2,100/MT based on +1.0SD to the rolling CPO-gasoil premium applied on current gasoil prices.

Update on Council of Palm Oil Producer Countries (CPOPC). During the conference, Dr. Fadhil Hasan (Executive Director, GAPKI) also elaborated on the recently announced CPOPC, to be established by end Oct-15, and the recently announced collaboration between Malaysia and Indonesia for the palm oil sector. We gather that the collaboration targets to: (i) establish a formal working group with a view to stabilise palm oil prices, (ii) promote the benefits of palm oil, (iii) harmonise the Malaysian and Indonesian Sustainable Palm Oil standards (MSPO & ISPO respectively), (iv) promote sustainable practices in the industry, (v) cooperate on R&D in the industry, and (vi) facilitate the private sector Green Economic Zone initiative in Indonesia. While we do not expect immediate impact as the collaboration is still in its early stages, we are long-term positive on the announcement. We understand that the countries may also expand discussions into export duty and oleochemical sector policies which should improve the overall outlook on big-cap planters with downstream exposure (ie SIME, IOICORP, KLK, FGV and PPB through Wilmar).

Maintain NEUTRAL on plantation sector. We reiterate our neutral view on the sector with no change to our FY15-16E CPO price forecasts of RM2,200-RM2,400/MT. While the generally positive long-term outlook during the conference is in line with our expectations, we are less optimistic in the near-term as we expect range-bound CPO prices, high edible oil stockpiles and likely a soft 3Q15. Taking into consideration the recent run-up in planters’ share prices and CPO prices, we opine that investor should consider a Sell-On-Strength strategy as short-term negative news may soon cut short the rally. Maintain TAANN (OP; TP: RM4.80) as our Top Pick, supported by potential timber segment upside and highest dividend yield (5.3%) in the sector.

Source: Kenanga Research - 9 Oct 2015