Regional Plantations - Maybank Kim Eng 2019-05-17: El Niño Threat Eases

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - El Niño Threat Eases

The region has enjoyed 3-years of relatively good weather since the last strong El Niño in 2015. YTD-2019, the weather has been largely fair although the usual dry season may be felt in the coming months. El Niño is not confirmed and its threat has eased.
With or without El Niño, we expect FFB output to slow down from 2Q19 after ~2-years of good harvest. Our 12M NEUTRAL view on the sector is unchanged, although long funds should consider taking the opportunity to accumulate bombed out small-mid caps.
Our BUYs are FIRST RESOURCES LIMITED (SGX:EB5), BUMITAMA AGRI LTD. (SGX:P8Z), Ta Ann and Sarawak Oil Palms.

Since the last drought that plagued the palm oil producing region in 3Q15, the weather has been relatively good with ample rainfall recorded (See Appendix 1 & 2 in attached PDF report). This was also evident from the significant drop in annual hotspot count recorded in Malaysia and Indonesia in 2016-18 compared to prior years.
YTD-2019, rainfall has also been generally ample throughout the region (with a small part of Indonesia being flooded) despite international weather models warning of a potential El Niño threat since end-2018. Nonetheless, the region is now entering into the Southwest Monsoon period (ie May-Sept months) whereby dry conditions typically prevail over the southern ASEAN region.
According to National Centers for Environmental Prediction, European Centre for Medium-Range Weather Forecasts, and UK Met Office, the rainfall forecasts for major palm oil producing regions during May-July appear to be normalized in 2019 (ie the usual drier season), perhaps with the exception of South Kalimantan which is expected to receive average-to-below average rainfall.

On 14 May 2019, the Australia Bureau of Meteorology (ABM) has downgraded its ENSO (El Niño-Southern Oscillation) Outlook to El Niño WATCH, just a month after it was raised to ALERT status. This means the chance of El Niño forming in 2019 is now around 50% (previously 70%), but still double the normal likelihood.
According to ABM, an El Niño WATCH is not a guarantee that El Niño will occur but an indication that some of the typical precursors of an event are in place. Sea surface temperatures in the tropical Pacific have hovered around the El Niño threshold since late Feb 2019 but there are signs the warm anomalies may soon ease. By Oct 2019, five of eight international weather models indicate a NEUTRAL ENSO state is most likely.

Rain or the lack of rain, we expect output in the region to slow over the next 12 months. 2019’s output growth will slow from 2Q19 as oil palm trees in the region enter into biological rest mode after nearly 2-years of good harvest post the last major El Niño, and due to a lack of fertilizing application by smallholders in 2H18 on poor CPO prices. We witnessed similar phenomenon between July 2001 and June 2002 in Malaysia after the 1997-98 strong El Nino.
After the 1997-98 El Nino, Malaysia’s FFB yields fell 9% y-o-y following two years of good harvest between July 1999 and June 2001.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.930 SAME 1.930

BUY MAINTAIN BUY 0.970 SAME 0.970