Plantation Companies - DBS Research 2016-03-10: Near-term strength

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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 

Plantation Companies - Near-term strength 

• Malaysian Feb 16 output of 1.043m MT was 7% lower than our forecast of 1.119m MT. 
• But 15% m-o-m drop in exports kept end-Feb 16 inventory level of 2.169m MT within expectations. 
• Output to recover in Mar 16; but so will exports; endMar 16 Malaysian palm oil stockpile may drop to 2.022m MT. 
• CY16F CPO price of RM2,600 unchanged. Top picks: BAL, IFAR, WIL and TSH. 

Steeper-than-normal seasonal drop. 

• Malaysia’s Feb 16 palm oil output of 1.043m MT (-18% m-o-m) was slightly lower than the 1.119m MT expected; as Sabah FFB yields dropped 20% m-o-m in a shorter month. 
• Despite the 8% y-o-y drop in output, we maintain CY16F production at 19.549m MT (-2% y-o-y); as we expect harvesting to be back-loaded this year. Based on historical trends, Mar 16 output is forecast to recover towards 1.332m MT (+28% m-o-m). 

Inventory to deplete faster than previously expected. 

• Lower Feb 16 production was matched with 15% m-o-m decline in exports to 1.085m MT; a 22% m-o-m drop in domestic consumption; and 84% jump in imports to 67k MT. This caused the inventory level to ease by a less steep 6% m-o-m to 2.169m MT – in line with forecast. 
• The slump in exports was primarily a reflection of rising stockpile in India and lower demand from China post-CNY; offset by slightly higher demand from the EU. 
• We had previously anticipated inventory to remain flat throughout the year – premised on a typical output pattern. But as the Feb 16 number suggests, 1H16 output now looks set to contribute only 42% of full-year production (vis-à-vis 45% normally). 
• With a projected 15% m-o-m recovery in exports (to 1.252m MT), we expect Mar 16 stockpile to further deplete towards 2.022m MT (vs. our previous forecast of 2.234m MT). 
• Yet, because of seasonally higher projected output, Mar 16 palm oil imports should ease towards 45k MT (-33% m-o-m). 

Near-term strength. 

• Based on our revised forecasts, we expect Malaysia’s palm oil inventory to bottom at 1.302m MT in Aug 16 before progressively recovering back towards 2.170m MT by end-Dec 16. By the same token, we expect palm oil prices to maintain the current trajectory (barring volatilities in currencies and crude oil prices) in the near term. 
• We should caution, however, that this price strength would be offset by lower yields and stronger MYR and IDR, which would adversely affect otherwise strong 1H16 top lines. 
• Our top picks. We continue to prefer BAL, IFAR and TSH within our coverage for their favourable age profile and large maturing estates (relative to peers) – as exposure to Indonesia’s export taxes/levies is more than priced in. 
• We also like Wilmar, which is the largest beneficiary of Indonesia’s biodiesel programme and has decent crushing margins in China. Wilmar is also a beneficiary of a sugar price recovery.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-03-10

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