Plantation - UOB Kay Hian 2016-05-18: 1Q16 Results Review ~ High CPO Prices Not Reflected In Results Yet

Plantation - UOB Kay Hian 2016-05-18: 1Q16 Results Review ~ High CPO Prices Not Reflected In Results Yet Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI  WILMAR INTERNATIONAL LIMITED F34.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Plantation - 1Q16 Results Review: High CPO Prices Not Reflected In Results Yet

  • Plantation companies’ 1Q16 earnings have yet to reflect the higher CPO selling prices. 
  • ASPs achieved mainly reflected Dec 15-Feb 16 CPO prices. Given lower ASP and lower production, 1Q16 earnings were down significantly yoy. 
  • Earnings are likely to be flattish yoy in 2Q16 due to flat production and pricing (net selling prices affected by the export duty in Indonesia) but should pick up, especially in 2H16, on higher production and ASP. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


1Q16 results dampened by lower production and export duty. 

  • The lower 1Q16 earnings were not a surprise to us given that production was affected by the severe dry weather in 2H15 and net selling prices in Indonesia were affected by the export duty effective 15 Jul 15. 
  • Sector net profit dropped 33% qoq and 12% yoy in 1Q16. Golden Agri’s earnings came in above expectations on better downstream contributions and China operations, but core earnings of both First Resources and Wilmar were below expectations. Bumitama’s results were as expected, ie higher sales volume from inventory drawdown offset the impact from lower production.

ASP to pick up from 2Q16. 

  • Palm product prices only started trending up from March and realised prices in Indonesia usually lag by a month, thus higher prices from March onwards will be reflected in 2Q16 results. But as there was no export duty (US$50/tonne on CPO) in 2Q15, the price increment impact will still not be fully captured in 2Q16. Much of the high-price impact or more comparable pricing will come only in 2H16. 
  • Indonesia’s new export duty on palm production was effective 15 Jul 15 and the funds collected will be to fund the biodiesel mandate, replanting for smallholders and for R&D.

Production recovery to gain more momentum only in late-3Q16. 

  • We understand that the lagged impact from the prolonged dry weather will continue to affect production in 2Q16. Rainfall has been good in central and west Kalimantan since late-Nov 15. Thus, there has been no further stress on the trees. 
  • All in, we expect production to pick up marginally in 2Q16 and peak in late-3Q16. 
  • Companies with younger age profile will see a stronger production recovery than those with older age profiles as older trees are severely impacted by the dry weather and will be slower in seeing a production recovery.



ACTION


Maintain OVERWEIGHT. 

  • The current weakness in CPO prices provides an opportunity for investors to increase exposure to the sector. We are expecting CPO prices to stay firm and trend higher into 1H17. 
  • We forecast CPO prices to average at RM2,500/tonne for 2016 (2015: RM2,158) and RM2,600/tonne for 2017.

Top picks. 

  • Singapore-listed plantation companies are still our preferred picks among the Singapore, Malaysia and Indonesia. We like: 
  1. Bumitama (BAL SP/Target: S$1.30) for its stronger earnings growth driven by positive production growth and highest leverage to CPO prices, 
  2. FR (FR SP/Target: S$2.20) for its efficiency in keeping costs low, being a beneficiary of Indonesia’s biodiesel mandate and earnings momentum picking up in 2H16 to reflect higher ASP and production, and 
  3. GGR (GGR SP/Target: S$0.44) for its highest beta to CPO prices.



ESSENTIALS


CPO ASP of each company not comparable. 

  • The CPO ASP of each company varies significantly every quarter. 
  • Each company reports different ASP. For example, the CPO ASP of BAL and IFAR largely refer to net selling prices in the domestic market after taking in all taxes and duty, while the CPO ASP of the other companies are mainly blended pricing after taking into consideration export prices (which include all the taxes). For example, FR’s ASP will be affected by the percentage of export sales, which are relatively higher than others in some quarters.


SECTOR CATALYSTS


Good progress in Indonesia’s biodiesel blending. 

  • Indonesia’s state-owned oil companies Pertamina and AKR Corporindo are expected to announce their second batch of biodiesel purchases of up to 1.6m kilolitres (kl) for May-Oct 16. 
  • Together with the previous biodiesel contracts of 1.87m kl, the total biodiesel blending (up to Oct 16) has met the market’s expectation of 2.0m-2.5m tonnes (or 2.3m-2.8m kl).

Occurrence of La Nina. 

  • All models indicate that El Nino will weaken and transit into ENSO-neutral conditions likely in late-spring or early-summer. 
  • Meanwhile, chances of La Nina conditions developing will increase as we enter the fall season. Should La Nina develop this year-end, soybean production will be affected and this will lead to higher soybean prices.


ASSUMPTION CHANGES

  • We maintain our CPO price assumptions of RM2,500/tonne for 2016 and RM2,600/tonne for 2017.
  • The next few events to watch out for in 2H16 and 2017 are: 
    1. production trend – the market may again have to acknowledge the reality of a shortage when 3Q16 production falls far below expectations, 
    2. demand could remain relatively good to post a marginal yoy growth despite higher CPO prices, 
    3. domestic usage - Indonesia and Malaysia could see usage of CPO grow yoy, and 
    4. confirmation of La Nina – likely to occur in Jun/Jul 16.


RISKS

  • Backtracking of biodiesel mandate in Indonesia and Malaysia with the weak crude oil prices.
  • Demand rationing due to strong recovery in CPO prices.


PEER COMPARISON 





Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-18
UOB Kay Hian Analyst Report BUY Maintain BUY 2.20 Same 2.20
BUY Maintain BUY 1.30 Same 1.30
BUY Maintain BUY 3.80 Same 3.80
BUY Maintain BUY 0.44 Same 0.44
HOLD Maintain HOLD 0.80 Same 0.80


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