We returned from the MPOB Palm Oil Economic Review & Outlook Seminar 2016 with our short-term positive CPO price outlook intact. During the seminar, the MPOB announced the average 2015 CPO price of RM2,154/metric ton (MT), which was within expectations, representing 99% and 98% of consensus and our forecasts, respectively. This was 10% lower YoY largely on persistently high palm oil stocks and weak crude oil prices in 2H15. Meanwhile, forecasters expect CPO prices to appreciate to RM2,500-2,700/MT due to lower palm oil yields and sustained Indian demand. However, we think that CPO prices are unlikely to trade above RM2,600/MT due to high soybean oil stocks. Also, biodiesel should not be a short-term catalyst due to falling crude oil prices. We maintain our NEUTRAL view on the sector, with TAANN (OP; TP: RM6.57) as our Top Pick on undemanding valuation (11.9x vs. peers’ 22.1x) and likely timber earnings upside. We also call OUTPERFORM on CBIP (TP: RM2.49) and UMCCA (TP: RM7.05); MARKET PERFORM on SIME (TP: RM7.80), IOICORP (TP: RM4.52), KLK (TP: RM22.80), PPB (TP: RM16.92), and IJMPLNT (TP: RM3.64); UNDERPERFORM on FGV (TP: RM1.47), GENP (TP: RM9.40), and TSH (TP: RM1.95).

2015 average price of RM2,154 within expectations. We attended the MPOB Palm Oil Economic Review & Outlook Seminar 2016, themed “Palm Oil: Maximizing Opportunities During Challenging Times”. The event was well attended, with some 200 participants from diverse backgrounds in the palm oil industry. At the seminar, MPOB Director General Datuk Dr. Choo Yuen May announced that the average CPO price in 2015 was RM2,154/metric ton (MT), which was within both consensus (RM2,180/MT) and our forecast (RM2,200/MT) at 98.8% and 97.9%, respectively. This was 9.6% lower than 2014’s average of RM2,384/MT largely due to high palm oil stocks and low crude oil prices in 2H15.

Oil World: CPO prices to appreciate to RM2,500-2,700/MT. At the seminar, Mr Thomas Mielke from Oil World outlined his CPO and oilseed market expectations for the year. Mr Mielke expects palm oil stocks to decline in 2016 as lagged drought impact is likely to lower yields in parts of Indonesia and Malaysia, resulting in weaker production; while demand should be sustained by India which will continue to see low domestic oilseed production, and thus higher import requirements. Meanwhile, soy production is expected to be maintained at record highs, alongside record stock levels. As a result, Mr Mielke believes that palm oil prices are likely to appreciate closer to soybean oil (SBO) prices, potentially rising by USD50-100/MT, which translates to RM2,500-2,700/MT. For us, although we concur with Mr Mielke’s assessment, as discussed in our Sector Update on 12-Jan- 16, we doubt that short-term CPO prices can trade above RM2,600/MT despite optimism on El Nino, as soybean stocks remain at record highs, leading to a high risk of substitution.

 Indonesian biodiesel outlook remains challenging. Mr Mohamad Fadhil Hasan from the Indonesian Palm Oil Association (GAPKI) noted that total biodiesel production in 2015 was only 1.30m kiloliters (kl) (1.15m MT), or 61% lower YoY, as the drop in crude oil price killed off biodiesel demand. Export demand plunged 82% to 300k kl (266k MT), while domestic demand declined 39% to 1.00m MT (0.89m MT). Looking ahead, Mr Fadhil noted that the Indonesian Oil Palm Estate fund (BPDP) expects 2016 collection of IDR10.0t, while surplus collection from 2015 stood at IDR6.0t. Based off Mr Fadhil’s estimate that IDR5.0k/liter subsidy is required for biodiesel production, we calculate that the fund could support up to 3.2m kl (2.83m MT) on 2016, which is 0.2m kl short of the required 3.4m kl to support the B20 biodiesel requirement. Note that although our calculation assumes the entire fund is used for biodiesel subsidy, we doubt that this will be the case as the fund is actually meant to support both biodiesel subsidies and replanting. Hence we reiterate our view that biodiesel production is likely to remain slow in 2016, and is unlikely to be a strong catalyst, unless crude oil prices rally in 2016.

Reiterate NEUTRAL on plantations, with TAANN (OP; TP: RM6.57) as our Top Pick. We maintain our NEUTRAL call on plantations with no change to our FY16E CPO price forecast of RM2,400/MT. The views presented at the seminar were largely in line with our own view, although we are less optimistic on peak CPO prices as noted above. We also widen our 1Q15 CPO price trading range to RM2,000-2,400/MT (from RM2,150-2,400) as downside has increased due to the recent drop in crude oil prices. TAANN remains our Top Pick, as valuations remain cheap at 11.9x against the sector average 22.1x, plus we expect the strong USD/MYR to support timber earnings at least through 1H16.

Source: Kenanga Research - 20 Jan 2016