Palm oil prices remain lacklustre and investor interest in the sector ismuted. However, commodity downcycles do not last forever and we believe the current cycle has already bottomed. While we cut our CPO price assumptions, we also roll forward our valuations as we believe investors should start looking ahead into 2016. Maintain NEUTRAL on the timber sector, with our Top Pick being Ta Ann.

• Lacklustre CPO prices but cycle has bottomed. Palm oil prices are still lacklustre and investor interest in the sector, muted – this is understandable since palm oil prices have been in a multi-year downcycle. Nevertheless, commodity downcycles do not last forever and we believe the current cycle has already bottomed.
• Indonesia and Malaysia’s biodiesel mandates a possible catalyst. Pending the implementation of Indonesia’s B10 biodiesel programme, palm oil prices have languished so far this year. YTD, the average price per tonne is only at MYR2,260 vs our average assumption of MYR2,500. We reduce our 2015 price assumption to MYR2,350 per tonne, which still implies stronger prices going forward. Biodiesel mandates in both Malaysia and Indonesia could still jump-start palm oil prices as the quantum of demand is significant. We expect the average price to strengthen to MYR2,500 per tonne next year.
• Long-term CPO production growth slowing. While biodiesel may jump-start palm oil prices, a sustained upcycle in prices is usually supported by a structural slowdown in production growth. Judging from the slowdown in new planting in Indonesia, this may happen by 2017 at the latest.
• Cutting 2015 CPO prices. We revise our CPO price per tonneassumptions for 2015 to MYR2,350, MYR2,500 for 2016 (unchanged) and MYR2,600 for 2017 (from MYR2,500).
• No change to timber price assumptions. As for the timber sector, our timber price assumptions remain unchanged. We believe log demand will continue to be stable while log prices will rise on supply constraints. However, this would be offset by weak plywood sales volumes and lacklustre plywood prices.
• Rolling forward valuations to 2016. We also roll forward our valuations to 2016 (from 2015), as we believe investors should start to look forward to next year, to start positioning for the future. We have also revised our valuation methodology for the sector, and employ a DCF valuation for the log sector on top of a replacement method for the plywood segment, while maintaining our target P/E of 16.0x 2016 for the plantation sector. We maintain our recommendation on Ta Ann (TAH MK, BUY, TP: MYR4.70) which is our top pick. We continue to be NEUTRAL on WTK (WTKH MK, TP: MYR1.15), and upgrade our recommendation on Jaya Tiasa (JT MK, TP: MYR1.50) to NEUTRAL (from Sell), as we believe the downside is limited. Our overall sector call remains a NEUTRAL.