Plantation - RHB Invest 2015-10-21: Upgrading 2016 CPO Price On Perfect Storm

SGinvestors.io

Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI 

Plantation - Upgrading 2016 CPO Price On Perfect Storm 

• Given the severity of the current El Nino and record high global reliance on palm oil, its impact on global edible oil supply will be unprecedented. 
• We believe prices will strengthen throughout 2016 and peak in 1Q or 2Q17. 
• We upgrade Malaysia to OVERWEIGHT and maintain our OVERWEIGHT call on Indonesia and Singapore plantation. 
• First Resources remains our top sector pick. 

 Unprecedented impact. 

• We believe the El Nino’s impact on edible oil supply will be the biggest ever given its strength and high global reliance on palm oil. In the last mild El Nino in 2009-2010, palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match the 1997-1998 El Nino, the impact on production will be more severe with Indonesia potentially experiencing a production decline next year. 

 No cushion from area growth. 

• Unlike the last two episodes of El Nino, there will be little or no mitigating factor from an increase in oil palm hectarage since Indonesia’s new planting has been slowing in the past few years. 

 Perfect storm in 2H16. 

• While soybean supply is still healthy, rapeseed crop has already been hit. We believe a perfect storm is due in 2H16 as the La Nina weather phenomenon usually follows the El Nino closely and will likely bring drought to soybean planting area. Meanwhile, palm oil production is seeing its sharpest decline in yield due to the 12-month drought impact. We expect most of the price gains during this period. 

 Higher average CPO price. 

• We raise our average CPO price for 2016 to MYR2,700/tonne from MYR2,500/tonne while lifting 2017 average to MYR2,750/tonne from MYR2,600/tonne. We expect palm oil prices to strengthen in all currencies once the CPO price uptrend is established. 

 Malaysia raised to OVERWEIGHT. 

• We upgrade Malaysia to OVERWEIGHT and maintain our OVERWEIGHT call on Singapore and Indonesia. Stocks upgraded to BUYs are Kuala Lumpur Kepong (KL Kepong), IJM Plantations and Sawit Sumbermas Sarana, while Felda Global Ventures is downgraded to SELL. 

Alvin Tai CFA RHB Securities | Hoe Lee Leng RHB Securities | Hariyanto Wijaya CFA, CFP, CA, CPA RHB Securities | http://www.rhbinvest.com.sg/ 2015-10-21

RHB Securities SGX Stock Analyst Report BUY Maintain BUY 2.69 Up 2.54

BUY Maintain BUY 1.44 Down 1.42

BUY Maintain BUY 0.48 Same 0.48