London Sumatra is among the cheapest plantation stocks in Indonesia, at a fire-sale EV/ha of USD6k. Maintain BUY, with a TP of IDR2,366 (55%). While palm oil prices are still lacklustre and investor interest in the sector remains subdued, we believe the current cycle has already bottomed. We cut our CPO price estimate but roll forward our valuations – as we believe investors should start looking ahead into 2016.
¨ Sluggish prices but cycle has hit a bottom already. Palm oil prices continue to be lacklustre and investor interest in the sector is muted. This is understandable, as palm oil prices have been in a multi-year downcycle. Nevertheless, commodity downcycles do not last forever and we believe the current cycle has already bottomed.
¨ Biodiesel mandates in Indonesia and Malaysia a possible catalyst. While Indonesia’s B10 biodiesel programme is imminent, palm oil prices have languished so far this year. The YTD average price per tonne is only at MYR2,260 vs our average assumption of MYR2,500. We cut our 2015 price assumption to MYR2,350 per tonne, which still implies stronger prices going forward. Biodiesel mandates in both Malaysia and Indonesia may give palm oil prices a jumpstart, as the quantum of demand is significant. We expect the average price to strengthen to MYR2,500 per tonne next year.
¨ Long-term CPO production growth eases. While biodiesel may jump-start palm oil prices, a sustained upcycle in prices is commonly supported by a structural slowdown in production growth. Judging from the slowdown in new planting in Indonesia, this may happen by 2017 at the latest.
¨ Lowering FY15 CPO price. We revise our effective CPO price assumptions for London Sumatra to IDR8,162 per kg for FY15 (from IDR8,787), and to IDR8,383 per kg for FY16 (from IDR8,796). Our forecasts are reduced accordingly by 8.2% and 2.5%.
¨ Rolling forward valuation to 2016. We roll forward our valuation to an 16x P/E, which leads to our TP being marginally reduced to IDR2,366 from IDR2,395 previously. London Sumatra trades at undemanding 10x-11x forward earnings and a fire-sale EV/ha level of USD6k.