Wednesday, September 2, 2015

Palm oil

Palm oil: Maybank-KE highlights that while 3M CPO price has corrected by 12% year-to-date in Ringgit terms, the correction was far steeper in USD terms which was down -27% over the same
period. The correction was lesser for soyoil (-13%) and rapeseed oil (-8%), which resulted in a widening of price gap of late.

As the current El Nino has failed to live up to expectations with no immediate impact on FFB production, the market has largely ignored this weather risk and instead chose to focus on several
headwinds, namely: 1) record US soybean planting amidst ample global soybean supply; 2) relatively high palm oil stockpile; 3) low crude oil prices discouraging discretionary biodiesel demand.

The S’pore listed plantation companies will adopt FRS16 in their 2016 reporting that effectively treats the oil palm trees as property, plant and equipment, and requires companies to start depreciating the trees which was not required in the past under the fair valuation method. In Maybank-KE’s revised earnings, the house have incorporated its preliminary estimates of FRS16 impact on First Resources and Bumitama’s earnings per share from 2016 onwards.

Additionally, Maybank-KE is revising down its 2015/16/17 CPO forecasts to RM2,100/2,300,2,400/t from the current RM2,400/2,500, 2,600/t. For the house USD forecasts, the revision was steeper at -19%, -17%, - 16%, to incorporate a weaker Ringgit of 3.80-3.90 (from 3.50)

Incorporating the lower CPO ASP and FRS16, the house is cutting 2015-17 net profit forecasts of the companies under its coverage, by between 4% to 60%.

Given the near term headwinds, Maybank-KE is maintaining its Neutral call on the sector, although long term investors should look to a better 2016 as the house believes there is limited downside to CPO ASP as commodity prices in USD are near post-GFC lows.

The house recommends investors focus on companies with good long term organic growth, and take shelter in asset buffer.

Following Maybank-KE earnings revisions, the house is downgrading First Resources to Hold from Buy (TP $1.60), while its top Buys are Bumitama Agri (TP: $0.85), Genting Plantations (TP: RM10.55) and Sarawak Oil Palms (TP: RM5.23).

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