Palm oil

Palm oil: Maybank-KE expects 2Q15 results for the palm oil sector to remain weak, highlighting that despite 2Q15 FFB output rebounding sharply from an exceptionally weak 1Q15, this is likely to be offset by low CPO spot ASP at RM2,194/t which has lagged expectations (-3% q/q, -15% y/y).

After being hit by a low yield cycle in 1Q15, FFB output recovered sizeably in 2Q. Sarawak, Peninsular Malaysia and Sumatra planters enjoyed the strongest recovery while Kalimantan and Sabah planters had it slow.

While FFB output rebounded sizeably to offset weak palm kernel and CPO ASPs in 2Q15, the house believes that companies have taken advantage of the relatively fair weather in 2Q15 to maximise fertilisation application, resulting in higher fertilising expenses during the quarter. Hence, the house expects the upcoming 2Q15 core results (excluding FX) to be either within or below consensus expectations.

For a selected few, 2Q15 earnings will continue to be affected by FX losses for those with US debt exposure but with Ringgit or Rupiah reporting currencies (e.g. IOI Corp, TSH Resources, Bumitama and Genting Plantations). However, the quantum of loss is likely to be a third of that experienced in 1Q15, as the USD had appreciated by ~2.0%/1.9% against the Rupiah and Ringgit during the quarter unless fresh debt had been raised last quarter.

Overall, Maybank-KE is maintaining its earnings models for now pending the release of the results, and has a Neutral view on the sector. Top Buy picks are First Resources (TP: $2.22) and Bumitama (TP: $1.14), for their growth proposition and deep embedded values of their landbank.