Plantation - RHB Research 2015-10-08: Possibly Better Prospects In 4Q And Beyond

Plantation - RHB Research 2015-10-08: Possibly Better Prospects In 4Q And Beyond Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI 

Plantation - Possibly Better Prospects In 4Q And Beyond 

  • While headwinds remain, palm oil prices have recovered from sub MYR1,900/tonne levels. Production has likely peaked for 2015, allowing the market to start factoring in upcoming production concerns. 4Q is seasonally a good quarter and prices may continue to be lifted by the El Nino factor in 2016. 
  • We expect El Nino to hit across the oil palm region eventually, although the impact is uneven so far. 

 Production has peaked. 

  • Malaysia’s palm oil production may have peaked in August, especially for West Malaysia. We suspect it is the same for Indonesia, as severe haze (with the Air Pollution Index (API) approaching 2,000) is likely to affect productivity. 
  • We understand that 3Q production for Kalimantan is disappointing due to the dryness experienced between July and October last year. 

 El Nino strengthening. 

  • The sea surface temperature (SST) anomaly is now more than 2 degrees Celcius above normal, which indicates a strong El Nino. In comparison, 2014 was just 1 degree Celcius above normal. Weather authorities think the current episode will last into 2Q16. 

 Still early days. 

  • As we are more than two quarters away before El Nino ends and the production impact will last into 2017, there is still plenty of room for palm oil prices and plantation stocks to move higher. We expect them to peak in 1Q17, taking into account the 12-month lag effect (see our report Quantifying El Nino dated 20 May 2015 for details). Our base case is for the price of palm oil to rally to MYR2,900 per tonne, but will likely be exceeded as effects become more widespread. 

 Soybean factor. 

  • Soybean is the major overhang for the plantation sector at the moment, as the US crop is sizeable. However, with its harvest progressing faster than normal, being 42%-complete, full completion may be as early as end-October. This would allow the price of palm oil to resume its recovery. 

 Stock picks. 

  • First Resources (FR SP, BUY, TP: SGD2.54) is still our top sector pick. We also like Genting Plantations (GENP MK, BUY, TP: MYR10.40), and Astra Agro Lestari (AALI IJ, BUY, TP: IDR28,337)

Alvin Tai CFA RHB Securities | Hoe Lee Leng RHB Securities | Hariyanto Wijaya CFA, CFP, CA, CPA RHB Securities | 2015-10-08
RHB Securities SGX Stock Analyst Report BUY Maintain BUY 2.54 Same 2.54
BUY Maintain BUY 1.44 Same 1.44
BUY Maintain BUY 0.48 Same 0.48