Plantation - UOB Kay Hian 2017-01-06: Plantation Companies’ Share Prices Underperform CPO Prices

Plantation - UOB Kay Hian 2017-01-06: Plantation Companies’ Share Prices Underperform CPO Prices FIRST RESOURCES LIMITED EB5.SI BUMITAMA AGRI LTD. P8Z.SI GOLDEN AGRI-RESOURCES LTD E5H.SI WILMAR INTERNATIONAL LIMITED F34.SI INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Plantation - Plantation Companies’ Share Prices Underperform CPO Prices

  • Share prices of plantation companies under our coverage underperformed (-10% yoy to +35% yoy) CPO prices (+45.6% yoy) in 2016. Going forward, plantation companies with strong recovery in FFB production should benefit from the current high CPO prices. 
  • Our top picks are Bumitama Agri (BAL), First Resources (FR) and KIML. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


2016 was an unusual year; 2H16 CPO price rally did not translate into better sector performance. 

  • Share prices of most plantation companies in 2016 did not perform in line with the strong recovery in CPO prices largely due to the much weaker-than-expected palm oil production as a result of the severe dry weather in 2015. 
  • Share prices of plantation companies under our coverage underperformed (-10% yoy to +35% yoy) CPO prices (+46% yoy) in 2016.

2017: Year of two tales. 

  • CPO prices are expected to stay firm in 1H17 as inventory replenishment is still relatively slow in both Malaysia and Indonesia. However, production recovery is expected to come, starting from late-3Q17. The strength of the recovery is still unknown, but based on our channel checks, most companies expect a strong recovery after the most severe tree stress in 2016, which will also be helped by the good rainfall in 2H16.

1H17: Performance to be supported by good earnings; CPO at RM2,800-3,300/ tonne. 

  • Companies will announce 4Q16 results from mid-February. We are expecting good results, especially for Indonesia-based companies because they were still seeing good production in Nov-Dec 16. 
  • 4Q16 results would have been supported by higher production and CPO ASP. To recap, production in Oct-Nov 16 was relatively good and some companies started to report yoy improvement in production and CPO ASP of about RM2,958/tonne in 4Q16 vs RM2,633/tonne in 3Q16 and RM2,162/tonne in 4Q15.


ACTION


Maintain OVERWEIGHT. 

  • CPO prices are expected to trend higher to RM2,800-3,300/ tonne in 1H17 as inventory is likely to remain low and production recovery is likely to be weak. The next share price catalyst is better-than-industry earnings growth from plantation companies. 
  • Sector earnings growth for 2017 is expected to be better than in 2016 as 2017 earnings will be supported by higher production and relatively high CPO prices. We expect CPO prices to average RM2,600/tonne for 2017 (2016: RM2,652/tonne).

Top picks. 

  • We like First Resources (FR SP/BUY/Target: S$2.00) and Bumitama Agri (BAL SP/BUY/Target: S$1.25) for their younger tree age which will allow a stronger production recovery as well as their exposure to Indonesia’s downstream operations (especially biodiesel). 
  • Among Malaysia small-to-mid-caps, we like KIML as its earnings growth is supported by: a) a recovery in FFB production growth, b) good milling margins from a better oil extraction rate, and c) extra income from value-add by-products. It offers sustainable dividend yields of 5-7% on the back of a strong balance sheet.


ESSENTIALS


Companies with strong production recovery are likely to outperform in 2017. 

  • Going forward, plantation companies that are able to show strong production recovery would outperform peers. Among Malaysia plantation companies under our coverage, KIML and Genting Plantations (GENP MK/HOLD/Target: RM10.55) should show the strongest production recovery. Meanwhile, FR and BAL have the highest production recovery among Singapore-listed plantation companies under our coverage. Companies with strong production recovery are able to benefit from the current high CPO prices.

Soyoil price increased only 9.4% yoy. 

  • Prices of soyoil, a close substitute for CPO, increased only 9.4% yoy mainly due to the decline (-2.8% yoy) in global soybean production in 2015/16. 
  • Oil World expects world soybean production to increase 7.2% yoy for 2016/17, and inventory to increase to 84.8m tonnes (+5.3% yoy) from 80.5m tonnes in 2015/16. This has capped upside for soybean prices.


SECTOR CATALYSTS


Good earnings reporting for next three quarters. 

  • The earnings reporting seasons in Feb 17 and May 17 could be a strong catalyst as companies are expected to deliver better results vs the preceding periods. These quarters will also start to see much higher selling prices, translating into better yoy earnings.

Weather disruption. 

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


ASSUMPTION CHANGES

  • None.


RISKS

  • Backtracking of biodiesel mandates in Indonesia and Malaysia after the recent fall in crude oil prices.







Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-06
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000
BUY Maintain BUY 1.250 Same 1.250
HOLD Maintain HOLD 0.420 Same 0.420
SELL Maintain SELL 3.050 Same 3.050
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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