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Apr 26, 2016 10:37:22
Soft Commodity…. Why we are BULLISH on CPO names – BUY SGRO & LSIP
· Long-term structural decline in supply: less new planting, cut-backs in fertilizing etc due to strained cashflow past few years, moratorium on new land. All should support higher CPO px long-term.
· Near-term catalysts in-check: biodiesel positive development, CPO inventory days should start to decline and reach as low as 40 days in 3Q16 (insufficient) on the back of el-nino effect (recall takes 9 months for elnino to impact production yield).
· New emerging catalysts: extreme weather anomalies in brazil and argentina. This should boost soybean px, and hence CPO px. All of this should help CPO px break above MYR3000 this year. Our earnings today assume 3000 – hence likely to see some upside risk.
· Top-picks: SGRO and AALI. On the latter, even if we assume right issue (15% earnings dilution) still see c.20% upside potential. Risk on AALI is potential MSCI deletion. But in reality if CPO px move up, all cpo stocks will move higher – so even LSIP is still appealing at this price.