Plantation - UOB Kay Hian 2015-11-30: A Boost From El Nino And Biodiesel

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Plantation Sector WILMAR INTERNATIONAL LIMITED F34.SI  FIRST RESOURCES LIMITED EB5.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI  BUMITAMA AGRI LTD P8Z.SI 

Plantation - A Boost From El Nino And Biodiesel 

• The plantation sector’s outlook is turning positive. CPO prices are expected to be supported by a stronger-than-expected El Nino and higher demand on Indonesia’s higher biodiesel blending mandate. 
• We raise our ASP assumptions to RM2,500-2,600 for 2015-16. Among the three markets, we prefer Singapore-listed companies as FR and BAL have a young age profile and will benefit from Indonesia’s biodiesel policies. 
• Maintain OVERWEIGHT. 

WHAT’S NEW 

• Raise CPO price assumptions for 2016-17...

• ... to RM2,500/tonne and RM2,600/tonne respectively (from RM2,300/tonne). The upward revision comes on the back of more positive industry developments which will lead to higher CPO prices in the next two years. 

• Stronger El Nino to hurt production in 2016. 

• In 2015, El Nino turned out to be stronger than our earlier expectation and is in fact the strongest El Nino since 1997-98. 
• With the current prolonged dryness, FFB yield in 2016 is likely to drop and palm oil production is expected to fall. We are expecting global palm oil production for 2016 to grow marginally by 0.7% to 61.7m tonnes (2015: 61.2m tonnes), largely driven by production growth in other countries, except for Malaysia and Indonesia. 
• Global palm oil production is expected to recover in 2H17, thereby leading to a 6% yoy growth in global production to 67m tonnes in 2017. 

• Demand recovery on Indonesia’s higher biodiesel blending mandate. 

• We are expecting demand growth to rebound to 7.4% (previously 5.6%) and 3.6% for 2016 and 2017 respectively. 
• 2015 has seen one of the slowest growth rates purely due to a contraction in biofuel demand. Based on the latest estimate by Pertamina, biodiesel demand from Pertamina is expected to jump 400% to 5.14m kilolitres (or 4.47m tonnes) in 2016 from 1.2m kilolitres (or 1.04m tonnes) in 2015. 

• CPO price capped by high inventory level. 

• Spot prices are capped by high inventories in both Malaysia and Indonesia, and thus there is no rush for buyers to pay higher prices now. However, we notice the price gap between spot month and forward contract CPO prices has widened to about RM174/tonne as of last Friday. 
• The forward curve has been rising and could be due to higher biodiesel demand in Indonesia, which will lead to tightened palm oil supply in 2016 and 1H17. 

ACTION 

• Maintain OVERWEIGHT. 

• In our 1H16 strategy note, we upgrade regional plantation to OVERWEIGHT from MARKET WEIGHT after raising our CPO price assumptions. CPO prices are expected to trend higher in 2016 as the inventory drawdown is likely to be fast-paced entering 1Q16. 
• Be selective. Not all companies will benefit from the rising prices if production decline outstrips the impact from higher CPO prices. Our stock selection criteria are: 
  1. companies with a young age profile, 
  2. companies least affected by dryness – avoid companies with high concentration in affected areas, 
  3. well-managed companies – lower cost of production and higher oil yield, and 
  4. integrated players with exposure to Indonesia’s biodiesel industry. 
• Top picks are First Resources (FR), Wilmar International and Bumitama Agri (BAL).

Regional Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-30

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