Plantation - 2017 A Bumper Crop Year?
- We believe CPO prices could remain at high levels up to 1Q17, on the back of the still-weak CPO output and the strong USD.
- Post-1Q17, however, we believe prices may weaken, as the recovery in CPO output would coincide with the South American soybean harvest – which should put pressure on vegetable oil prices.
- We maintain our MYR2,500/tonne CPO price assumption for 2017, as we expect the commodity to be traded in a volatile range of MYR2,300-3,000/tonne during the year.
- Maintain NEUTRAL. Our Top Pick is Golden Agri, a liquid high-beta proxy to the sector.
CPO prices shadowing soybean price movement.
- CPO prices have risen to new highs, at close to MYR3,000/tonne at the end of December (+11% MoM, 27% YTD). We believe this was in response to the surprise US election results, which led to the USD/MYR strengthening by as much as 7% by end-November. This, together with the recent spike in crude oil prices on the back of the OPEC decision to cut oil production, as well as several other factors in the US, led to a sharp rise in soybean prices (up 11% in one month) to USD0.375/bushel.
- This brought the YTD price increase to 29% YoY at the time of writing. With this, CPO prices followed suit, bolstered also by the lower-than-expected CPO output in Malaysia in October, and the unexpected early end to the peak season.
CPO prices to stay moderate after 1Q17.
- Going forward, we believe CPO prices would likely stay at current high levels until 1Q17, given the anticipated weakness in output in 1Q17, due to the 24-month lagged impact of El Nino. However, post-1Q17, we expect a marked recovery in CPO output, as productivity bounces back post-El Nino. This, together with the higher soybean output expected to come out from South America during the same period, would start to weigh on CPO prices.
- We expect CPO prices to range between MYR2,300 and MYR3,000 a tonne in 2017, with an average of MYR2,500/tonne.
Demand to remain lacklustre.
- On the demand front, we expect demand from India to pick up once the short-term impact from the INR demonetisation dies down. However, China’s demand is likely to remain anaemic, on the back of the abundance of soybean crops as well as its soybean and rapeseed oil held in the Government’s reserves.
- We remain NEUTRAL on the sector, and continue to favour companies with a more diversified geographical landbank, which would enable plantations to weather extreme climate conditions better than their peers.
- Our Top Pick of the Singaporean-listed planters is Golden Agri (GGR SP, BUY, TP: SGD0.46), which is trading at an inexpensive 2017F P/E of 15x, below the regional peer average of 19x. Our TP implies an EV/ha of USD12,000 and a 2017F P/E of 18x, which is at a discount to its regional peer average of USD19,000/ha.