Plantations - RHB Invest 2015-12-02: El Nino’s Unprecedented Impact On Edible Oil

Plantations - RHB Invest 2015-12-02: El Nino’s Unprecedented Impact On Edible Oil Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI 

Plantation - El Nino’s Unprecedented Impact On Edible Oil 

  • Given the severity of the current El Nino and record high global reliance on palm oil, its impact on global edible oil supply would be unprecedented. 
  • We maintain our OVERWEIGHT call on Singapore’s plantations segment. 
  • We believe prices are likely to strengthen throughout 2016 and peak in 1Q or 2Q17. 
  • Soybean supply remains strong but is well absorbed. 
  • First Resources remains our sector Top 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. 

 El Nino is still strengthening. 

  • The sea surface temperature anomaly is now 2.42 degrees above normal and is expected peak at 2.8 degrees before weakening. 

 No cushion from area growth. 

  • Unlike the last two episodes of El Nino, there is likely to 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 is likely to bring drought to soybean planting area. 
  • Meanwhile, palm oil production is seeing its sharpest decline in yield due to the impact of the 12-month drought. 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. 

 Indonesia’s biodiesel. 

  • After months of delay, Indonesia’s mandatory biodiesel programme is finally getting off the ground with 1.6m tonnes of supply said to have been secured by Pertamina for usage up to Apr 2016. This would soak up a large part of Indonesia’s stockpile. 
  • For 2016 in full, we believe Indonesia’s biodiesel usage wound amount to 3m tonnes. 

 Singapore’s OVERWEIGHT maintained. 

  • We maintain our OVERWEIGHT stance for Singapore’s plantations sector with BUY calls for First Resources, Golden Agri and Bumitama Resources. 
  • First Resources continues to be our regional sector Top Pick.

Singapore Research RHB Research | 2015-12-02
RHB Securities SGX Stock Analyst Report BUY Maintain BUY 2.69 Same 2.69
BUY Maintain BUY 1.41 Same 1.41
BUY Maintain BUY 0.42 Same 0.42