Following a sector-wide CPO price downgrade, we lower our earnings projections for WTK by 4.0% for FY14 and 6.8% for FY15.  Accordingly, we  reduce  our  FV  to  MYR1.40  (from  MYR1.50)  and  maintain  our NEUTRAL  recommendation.  WTK’s  earnings  are  still  not  highly leveraged to CPO prices as the contribution from this division currently makes up only <10% of group earnings. 

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

Palm oil prices close to bottom. We believe palm oil prices are weeks away  from  a  bottom  and  should  strengthen  in  4Q  as  well as  in  CY15. That said, as the currently low levels will pull down  the full year average, we are cutting in our price assumptions. 

We expect prices to strengthen in 4Q14 and 2015.  This is  due to:  i) the  seasonal  slowdown in production in 4Q14,  which  since  year  2000, has  seen  CPO  prices  jump  11%  from  end-Sept  to  end-Dec;  ii)  the slower-than-expected  off-take  for  biodiesel  in  Indonesia  in  2014  which was caused by pricing issues is no longer applicable, while distribution infrastructure  is  being  developed,  which  should  see  Indonesia’s  B10 programme in full swing in 2015; and  iii) the downside for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 price is limited as it is already trading at or  close to  production cost.  Although the  stock/usage ratio will be high this year  at  >30% due to bumper crop in the US, such a high stock/usage ratio usually does not persist. 

Reducing forecasts.  We are reducing our  earnings  forecasts for WTK following our sector-wide price cuts of 4.0% for FY14 and 6.8% for FY15. Our fresh fruit bunches (FFB)  price assumptions are MYR456/tonne for FY14 (from MYR540) and MYR475/tonne for FY15 (from MYR580). 

Maintain  NEUTRAL.  Post-earnings  revision,  we  reduce  our  FV  to MYR1.40  (from  MYR1.50),  based  on  an  unchanged  target  P/E  of  16x CY15.  We  maintain  our  NEUTRAL  recommendation  on  WTK.  The company’s  earnings  are  not  as  highly leveraged  to  CPO  prices  as  the contribution  from  this  division  currently  makes  up  <10%  of  group earnings. We  estimate  that  every  MYR100/tonne  change in  CPO price will affect its earnings by 1-2% per annum.

Source: RHB