Dec 16, 2016 11:41:27

Regional Plantation - 2017 – a Bumper Crop Year?

We believe CPO prices would remain at high levels up to 1Q17, on the back of the still weak CPO output and strong USD. However, post-1Q17, we believe prices are likely to weaken, as the recovery in CPO output would coincide with the South American soybean harvest, which should put pressure on vegetable oil prices. We maintain our MYR2,500/tonne CPO price assumption for 2017, expecting prices to trade at a volatile range of MYR2,300-3,000/tonne during the year. No change to our NEUTRAL sector call and our regional Top Pick of Kuala Lumpur Kepong.

¨ CPO prices shadowing soybean price movement. CPO prices have risen to new highs, at close to MYR3,000/tonne at the time of writing (+12% MoM and 27% YTD). We believe this was in response to the surprise US election result, which led to USD/MYR strengthening by as much as 7% in the last month. This – together with the recent spike in crude oil prices on the back of the Organisation of the Petroleum Exporting Countries’(OPEC) decision to cut oil production, and several other factors in the US – led to a sharp rise in soybean prices (up 11% in one month) to USD0.375/bushel, bringing YTD price increase to 29% YoY. CPO prices followed suit, bolstered also by the lower-than-expected CPO output in Malaysia in October, and the unexpected early end to the peak season.

¨ CPO prices to stay moderate after 1Q17. Going forward, we believe CPO prices are likely to stay at current high levels until 1Q17, given the anticipated weakness in output in 1Q17, coming from the 24-month lagged impact of El Nino. However, post-1Q17, we expect a marked recovery in CPO output, as productivity bounces back post-El Nino. This, together with the higher soybean output that is expected to come out from South America during the same period, would start to weigh on CPO prices. We expect CPO prices to range between MYR2,300-3.000/tonne in 2017, with an average of MYR2,500/tonne.

¨ Demand to remain lackluster. On the demand front, we expect demand from India to pick up once the short-term impact from the INR fiasco dies down. However, China’s demand is likely to remain anaemic, on the back of the abundance of soybean crop as well as its soybean and rapeseed oil held in government reserves.

NEUTRAL sector call maintained, with unchanged CPO price assumptions of MYR2,500 per tonne for 2016 and 2017. Our regional Top Pick remains Kuala Lumpur Kepong (KLK MK, BUY, MYR26.80), given its geographical landbank diversity, exposure to Indonesian downstream operations which enjoys tax advantages and relatively inexpensive valuations versus its peers. We also like Sime Darby (SIME MK, BUY, MYR9.25) in Malaysia for its restructuring angle, given management’s plans to unlock value from the group. In Singapore, we like Golden Agri-Resources (Golden Agri)(GGR SP, BUY, SGD0.46) for its diversified geographical landbank, while its integrated operations well as soybean crushing enables it to capture margins all across the industry spectrum. In Indonesia, we like London Sumatra ($LSIP, BUY, IDR2,050) due to its undemanding valuations, its net cash and its good stock liquidity. (Hoe Lee Leng, Hariyanto Wijaya, CFA, CPA)