Regional Plantations - Maybank Kim Eng 2019-09-11: Clear Skies In October?

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

Regional Plantations - Clear Skies In October?

After an absence of ~3 years, haze is back due to the lack of rainfall associated with the Southwest monsoon and the positive Indian Ocean Dipole (IOD). Indonesia is more affected than Malaysia. We believe this phase of dryness will have minor negative impact on output in 2020 unless the rain deficit and haze persists for another few months.
A change in monsoon in October is the best bet to clear the haze.
Maintain NEUTRAL on the sector.
Our BUYs are First Resources and Bumitama Agri, Ta Ann & Sarawak Oil Palms.

The lack of rainfall over the southern ASEAN region associated with the southwest monsoon (typically from June to Sept) and positive IOD (see next paragraph) has led to below-average rainfall recorded especially in South Sumatra, West Kalimantan, Central Kalimantan, and South Kalimantan since July 2019. The relative dry spell in the affected area has led to increased hotspot counts (not seen in the last 3 years), wild forest fires, and haze.
The southwest monsoon is likely to persist until October, according to the ASEAN specialized meteorological centre. After that, it transitions to inter-monsoon conditions by late-October or early-November, which typically results in an increase in shower activities over the southern ASEAN region. Unfortunately, the latest rainfall forecast by weather models is still predicting below-normal rainfall for Sept-Oct-Nov 2019.

According to the Australian Bureau of Meteorology (ABM), the El Niño– Southern Oscillation (ENSO) remains neutral and hence the absence of El Niño’s influence on the present climate. While the Pacific Ocean (associated with El Niño) is not the key concern this time, it is the Indian Ocean that is influencing the climate in this region.
According to ABM, the IOD has been positive since July 2019 and a positive IOD basically draws away rainfall from this region. All six international climate models surveyed by the ABM indicate the IOD will remain positive through November 2019.
The last positive IOD was recorded in 2015, the same year the last El Niño occurred which led to the formation of a “super El Niño” that resulted in severe drought and haze in this region.

Post 2015’s strong El Nino, Malaysia’s average CPO yield contracted by 15% y-o-y to 3.21t/ha in 2016. For that to repeat, the current dry phase needs to persist for another few months. Without prolonged drought, we believe the impact on output in 2020 will be slightly negative only. However, the bigger concern for 2020-21 is the slower growth in mature oil palm area due to the lack of new plantings in Indonesia and Malaysia since 2015.
As supply tightens in 2020-21, we expect CPO price to strengthen into 2020.
Our CPO ASP forecast of MYR2,100/t for 2019 and MYR2,300/t for 2020 are unchanged.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-11

SGX Stock Analyst Report BUY MAINTAIN BUY 1.800 SAME 1.800

BUY MAINTAIN BUY 0.800 SAME 0.800