Plantation Singapore - UOB Kay Hian 2016-12-08: Riding On Higher CPO Prices

Plantation Singapore - UOB Kay Hian 2016-12-08: Riding On Higher CPO Prices Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  WILMAR INTERNATIONAL LIMITED F34.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Plantation Singapore - Riding On Higher CPO Prices

  • Dumai/Belawan CPO prices hit a two-year high of US$748/tonne on 5 Dec 16 and this was beyond our expectation. 
  • We conducted an earnings and target price sensitivity study for the Singapore-listed plantation companies under our coverage. 
  • We conclude that Golden Agri (GGR)’s earnings are the most sensitive to CPO prices, while Bumitama Agri (BAL) provides the greatest share price upside. 
  • We prefer BAL as it has the potential to deliver a faster recovery in FFB production vs peers. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


CPO prices surged to two-year high. 

  • Dumai/Belawan CPO prices recorded a 2-year high of US$748/tonne on 5 Dec 16 and this was beyond our expectation. We were expecting CPO prices to hover in the range of US$680-720/tonne in 4Q16. This could have been due to: 
    1. tight supply of palm oil, and, 
    2. CPO prices tracking soybean futures’ performance. 
  • Soybean futures rallied due to market fears of dryness in Argentina which could affect planting progress. 
  • Average Dumai/Belawan CPO prices for 1 Oct 16 to 5 Dec 16 was at US$694/tonne vs 3Q16’s average of RM682/tonne. Thus, the company which can deliver strong production in 4Q16 will benefit from higher CPO prices.
  • We conducted an earnings and target price sensitivity analysis for Singapore-listed plantation companies under our coverage, assuming a RM200/tonne increase in CPO ASP for 2017-18 from our base case. We conclude that: 

a) GGR’s earnings are more sensitive to CPO price movements. 

  • Among companies under our coverage, Golden Agri’s (GGR) earnings are the most sensitive to CPO price movement followed by First Resources (FR) and Bumitama Agri (BAL).
  • Nevertheless, GGR’s FFB production recovery could lag behind peers and hence it may not able to fully capture the increase in CPO price. Moreover, its earnings might affect by its oilseeds division performance.

b) BAL provides greater share price upside. 

  • Based on our sensitivity study which uses a CPO price assumption of RM2,800/tonne, BAL’s target price is 16% higher than our current target price of S$1.25, implying an upside of 81.3%. 
  • GGR’s share price has been tracking the CPO price uptrend, increasing 19% vs CPO prices which were up 17% from the low of US$640/tonne in 10 Oct 16. BAL’s share price increased only 12% from 10 Oct 16 to 6 Dec 16, lagging behind peers. Moreover, BAL’s share price should be supported by stronger production in 4Q16 and a faster recovery in 2017 as the lagged impact from drought is less severe in Kalimantan. We are expecting BAL’s FFB production to grow 15.6% yoy for 2017.


ACTION


Maintain OVERWEIGHT. 

  • We expect CPO prices to stay firm and trend higher into 1H17.
  • We forecast CPO prices of RM2,500/tonne for 2016 (2015: RM2,158) and RM2,600/tonne for 2017.

Top picks. 

  • Singapore-listed plantation companies are still our preferred picks. 
  • We like BAL (Target: S$1.25) for its stronger earnings growth driven by positive production growth and highest leverage to CPO price. 
  • Although FR’s (Target: S$2.00) current share prices are close to our target prices, we are maintaining our BUY recommendations for now. If CPO prices stay firm at above RM3,100-3,300/tonne for the next six months there would be potential for stronger earnings in 4Q16 and 1Q17 to support share price performance. 
  • Meanwhile, we downgrade GGR to HOLD (from BUY) and maintain target price of S$0.42 after recent strong share price performance.


SECTOR CATALYSTS


Weather disruption. 

  • Agricultural production has been impacted by extreme weather.
  • Any negative impact from the weather would be positive to prices.

La Nina. 

  • According to NOAA, La Niña conditions could persist (~55% chance) through winter 2016-17. Should La Nina develop during this year-end, it will affect soybean planting in Argentina, which will lead to higher soybean prices, and in turn be positive to CPO prices.


ASSUMPTION CHANGES

  • No change to our CPO price assumptions in our earnings estimates.


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.
  • Demand rationing due to strong recovery in CPO prices.






Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-12-08
UOB Kay Hian Analyst Report BUY Maintain BUY 2.00 Same 2.00
BUY Maintain BUY 1.25 Same 1.25
SELL Maintain SELL 3.05 Same 3.05
HOLD Downgrade BUY 0.42 Same 0.42
NOT RATED Maintain NOT RATED 99998 Same 99998






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