Plantations 2016 Outlook - DBS Research 2015-12-17: A better year for prices

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Plantation WILMAR INTERNATIONAL LIMITED F34.SI  FIRST RESOURCES LIMITED EB5.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI  BUMITAMA AGRI LTD P8Z.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI 

Plantations 2016 Outlook - A better year for prices 

• CY16F CPO ASP of RM2,340 is under review – as we reassess impact from CY15 dry weather and soybean supply/exchange rate forecasts. 
• Watch out for steeper-than-normal drop in 1Q16 FFB yields, flood of Argentine soybeans. 
• Upside risks: pronounced El Nino impact, Indonesia/US biodiesel blending, recovery in crude oil prices. 
• Top BUY: Wilmar, with a TP of S$3.70. 

Outlook 

 A better year for prices. 

• Bearing the lagged impact of dry weather seen in Sabah and Johor this year, we expect Malaysian palm oil output to ease 0-4% next year. Much of the drop is expected to occur during the seasonally low 1Q16. Yet with most of Indonesian oil palm-growing provinces receiving far less than 100mm for more than three consecutive months in 2H15, we anticipate a more pronounced impact to palm oil supply there (partly offset by large new maturities). 
• Lower output and a ramp-up in biodiesel blending through Apr-16 should therefore normalise global palm oil stockpile fairly quickly from current record levels. 

 Four key issues to watch. 

• We believe the market has mostly priced in prospective El Nino and B15/B20 impacts (as evident in the wide divergence between futures and spot prices). But continued strength in CPO prices remains subject to notable uncertainties, namely: 
  1. potential release of Argentine oldcrop soybean inventories (now estimated at 19.8m MT or 3.6m MT of soybean oil equivalent), 
  2. size of South American soybean crop (expected to reach 172.6m MT), 
  3. US biodiesel demand, 
  4. crude oil prices, and 
  5. USD strength. 
• There remains a possibility that severe dry weather and forest fires would return in 1Q16 – as was the case in the previous strong CY97/98 El Nino occurrence. 

 CY16F CPO price under review. 

• While YTD spot palm oil prices have averaged in line with our expectations, CY16F palm oil price of RM2,340 is under review as we reassess palm oil supply/demand (i.e. on impact of CY15 dry weather) as well as soybean supply/exchange rate forecasts. 

Valuations & Stock Picks 

• Planters with significant presence in Indonesia would continue to see the impact of B15/B20 export levies. We also expect weaker CY16 FFB yields of planters with large estates in Sabah – which would weigh on earnings. 
• As positive CY16 earnings drivers are increasingly reliant on exogenous factors (i.e. Indonesia’s biodiesel implementation, crude oil prices), we believe any exposure in this sector should be based on strong balance sheet and strong pipeline of maturing estates. 
• We continue to recommend Wilmar International – as large processing capacities, the Indonesian B15/20 programme, favourable consumer product margins and strong oilseed crushing margins should work to boost its FY16F earnings.

Peer Comparison

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2015-12-17

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.70 Same 3.70

HOLD Maintain HOLD 1.85 Same 1.85

HOLD Maintain HOLD 0.52 Same 0.52

HOLD Maintain HOLD 0.86 Same 0.86

NOT RATED Maintain NOT RATED 0.29 Same 0.29