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Feb 06, 2017 14:18:46

Regional Plantation: Share Prices Lagging CPO Prices

Share prices of most plantation stocks have not performed in line with CPO prices, possibly due to the anticipated strong recovery in FFB output likely to come from Indonesia. It could also be due to the market’s cynicism that CPO prices would remain at current high levels. We continue to advocate a trading strategy for the plantation sector – buying liquid high beta stocks capable of surprising on the upside in terms of FFB output. NEUTRAL.

  • Share prices not moving in line with CPO prices. CPO prices remain above MYR3,000/tonne currently. We maintain that the current high prices are likely to remain up to end-1Q17. However, we note that despite the current high prices, only the Singapore Exchange (SGX)-listed and Jakarta Stock Exchange (JSX)-listed stocks have moved in a similar direction to CPO prices (Figures1 and 2). Most Malaysian-listed stocks have not performed in line with CPO prices, with the exception of Sime Darby (Figures 3 and 4). This could be due to:
    i. The valuation premium that Malaysian stocks command;
    ii. The anticipated strong recovery in FFB output which is likely to come more from Indonesia, rather than Malaysia;
    iii. The cynicism of investors that CPO price can hold on at current levels. This cynicism is also reflected in the CPO futures price (four months and above), which is trading at a 10% discount to spot prices.
     
  • Still reflecting prices of MYR2,400-2,600/tonne. It is also important to see what current share prices are reflecting in terms of CPO prices now (Figure 5). Based on our analysis, most stocks are still reflecting CPO prices of MYR2,400-2,600/tonne, which corroborates our view that the market does not expect current higher prices to sustain. Stocks reflecting CPO prices above those levels include IOI Corp (IOI), TSH Resources (TSH), IJM Plantations (IJMP) and Felda Global Ventures (FGV).
      
  • 4Q16 results likely mainly in line. We continue to advocate a trading strategy, given our expectation that CPO prices are likely to moderate post-1Q17. As such, we like stocks that are capable of surprising on the upside in terms of earnings and liquid high-beta stocks. For the upcoming results, we believe most earnings would come in within expectations, with four companies – IOIC, FGV, Sarawak Oil Palms (SOP) and TSH – likely to post disappointing earnings due to weaker-than-expected FFB output. We also up our forecasts for two stocks which look capable of posting better-than-expected earnings – Bumitama Agri and First Resources. We raised our forecasts to impute our latest in-house exchange rate assumptions, higher FFB output and PK prices.
     
  • Risks include extreme climate conditions, a change in demand and supply dynamics and extreme fluctuations of exchange rates and crude oil prices.
      
  • Still NEUTRAL. We expect volatility to be the name of the game in 2017, with the current strong CPO prices moderating after 1Q17, as CPO production recovers more significantly and soybean crop from South America starts being harvested. We keep our MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Picks – Kuala Lumpur Kepong (KLK), Golden AgriResources and London Sumatra ($LSIP) – remain. We also like Sime Darby as a restructuring play. (Hoe Lee Leng)
      
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