Commodities - CIMB Research 2016-12-05: Neutral, A Better Year In 2017

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

Commodities - Neutral, a better year in 2017

Stronger FFB output to drive FY17 earnings 

• We expect upstream palm oil players to report higher pretax profit in 2017, fuelled mainly by greater FFB output and better palm product prices. The key driver for 2017 earnings will be higher FFB yields as the El Nino effect fades. 
• The higher yields are expected to drive down costs of production of CPO on a per tonne basis. We expect CPO prices to average RM2,600 per tonne in 2017, which is higher than the YTD average price of RM2,571.5 per tonne in Malaysia. 
• The downstream businesses are also expected to do well in view of higher palm oil supplies, which will boost utilisation rates of refineries and improve refining margins.

FFB yields to recover from El Nino effect

• Singapore-listed planters under our coverage reported 9% to 20% yoy declines in FFB output in 9M16 as FFB yields were negatively impacted by El Nino- induced drought and haze experienced in the Indonesian estates in 2015.
• Our checks with the planters revealed that weather conditions in most palm oil regions normalised in 2016. In view of this, we project Singapore planters with estates in Indonesia to post higher growth in 2017.
• The bulk of the recovery in yields is likely to be in 2H17 as 1H17 yields may still be affected by the lingering El Nino impact.

Key bullish factors for CPO prices in 2017 

• The key bullish factors for CPO prices in 2017 are 
  1. the sharp drop in palm oil supply in 2016 of around 3m-6m tonnes due to the El Nino event in 2015. This is projected to cut global palm oil and edible oil stocks by 3m and 4.8m tonnes, respectively, 
  2. Indonesia’s success in raising biodiesel usage in 2016 and the need for a further rise in soya oil prices to finance a growing proportion of the crush margin for soybeans as it is getting more difficult to sell soya meal, 
  3. a potential La Nina event, which could lead to weaker soybean supplies and indirectly benefit CPO prices, and 
  4. US’s and Indonesia’s plan to raise biodiesel mandates as well as 
  5. higher crude oil prices.

Bearish factors for CPO price in 2017

• The key bearish factors are: 
  1. projections that palm oil supply will rise by 6.5m tonnes in 2017, 
  2. expectations that China could release another 2.5m tonnes of old rapeseed oil stocks to pare down its stocks of 3.4m-4m tonnes, possibly leading to weaker China demand for palm oil, 
  3. weaker palm oil demand from India due to the removal of high value rupee notes, 
  4. high global soybean stocks and supplies, and 
  5. the inability of the CPO fund in Indonesia to support the biodiesel mandate if the gap between CPO price and crude oil price widens, which will lead to weaker biodiesel usage in Indonesia.

Upgrade to Neutral; First Resources is preferred pick 

• We are upgrading the sector from Underweight to Neutral in view of improving production prospects and our recent upgrade of Wilmar from Reduce to Hold.
• First Resources is our only Add call and our preferred commodities pick due to its 
  1. young estates (50% of planted estates are below seven years old), and 
  2. strong management as cost of production of US$230/tonne is among the lowest among the Singapore planters. 
  Key re-rating catalysts include stronger- than-expected earnings. Key risks are lower CPO prices and production.
• We have a Hold call on Wilmar as we see strong share price support given that it is trading close to its BV while our recommendation for Golden Agri is a Reduce due to its rich valuations and older estates profile compared to peers.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

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