Following a sector-wide CPO price downgrade, we lower our earnings projections for  Jaya Tiasa  by 19.8% for FY15 (FYE June) and 24.6% for FY16. We reduce our SOP-based FV to MYR1.81  (from MYR2.41).    The company’s  strong  FFB  production  growth  (as  its  estates  increasingly mature),  however,  is  more  than  offset  by  the  impact  of  lower  CPO prices. As such, we downgrade our recommendation to SELL. 

Downgrading  sector-wide  CPO  prices.  We  are  downgrading  the Malaysian  plantation  sector to  NEUTRAL  (from  Overweight). Our  CPO price assumptions  are  lowered  to MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15.  

Palm oil prices close to bottom levels. We believe palm oil prices are weeks away from a bottom and should strengthen in the 4Q as well as in CY15.  That  said,  the  current  low  levels  could  pull  down  the  full-year average – which has led us to cut our assumptions. 

We  expect  prices  to  strengthen  in  4Q14  and  2015,  due  to:  i)  The seasonal slowdown in production in 4Q14. Since 2000, CPO prices have risen by 11% from end-Sept to end-Dec, ii) the slower-than-expected offtake  for  biodiesel  in  Indonesia  in  2014  which  was  caused  by  pricing issues  is  no  longer  applicable,  while  distribution  infrastructure  is  being developed, which should see Indonesia’s B10 programme in full swing in 2015, and iii) the downside for soybean prices  is limited as it is already trading  at  or  near production  cost.  Though  its  stock/usage  ratio  will  be high this year (>30%) due to  a  bumper crop in the US,  such high  ratio levels usually don’t persist. 

Reducing  forecasts.  We  are  reducing  our  forecasts  for  Jaya  Tiasa following  the  sector-wide  price  cut  by  19.8%  for  FY15  and  24.6%  for FY16. Our CPO price assumptions are MYR2,450/tonne for FY15  (from MYR2,800) and MYR2,500/tonne for FY16 (from MYR2,900). 

Downgrade  to  SELL.  Post  earnings  revision,  our  SOP-based  FV  is revised  to  MYR1.81  (from  MYR2.41)  by  applying  an  unchanged  16x CY15  target  P/E  to  its  plantation  division  and  12x  CY15  for  its  timberdivision.  Despite  Jaya  Tiasa’s  strong  FFB  production  growth  coming from  increasing  maturity  of  its  estates,  this  is  more  than  offset  by  the impact of lower CPO prices. We note that every MYR100/tonne change in CPO price would  affect its  earnings by 6-8% per annum. As such, we downgrade the stock to SELL (from Buy).

Source: RHB