Plantation Sector - Relief for Malaysian refiners soon OVERWEIGHT

- Refining margins in Indonesia to normalise by next year? Based on our recent meetings with a few plantation companies in Indonesia, we are of the view that palm oil refining margins in Indonesia are likely to ease by year-end and normalise by next year. This should provide a relief to the refining industry in Malaysia.  Refining margins in Indonesia are expected to normalise due to the increase in the refining capacity. New refining capacity is envisaged to come on-stream from end-FY12F onwards. Part of Wilmar International’s new refining capacity is expected to be commissioned in 4QFY12. We estimate Wilmar’s new refining capacity at 3.5mil tonnes/year in total. Apart from Wilmar, Sime Darby’s, Kuala Lumpur Kepong’s and PT Smart’s refineries are expected to be completed next year.  Various industry players estimate Indonesia’s refining capacity between 24 to 30mil tonnes/year currently. CPO production in Indonesia is forecast at 25mil tonnes in 2012F. 

- CPO price in Indonesia to narrow gap with Malaysia. Due to the jump in refining capacity, we believe that palm oil refiners in Indonesia would be competing for CPO. As such, domestic CPO prices in the country are likely to rise, narrowing the gap between CPO prices in Malaysia. We estimate the difference between CPO prices in Indonesia and Malaysia at RM516/tonne presently. In 2011, the price differential was as wide as RM700/tonne to RM800/tonne.  We understand that CPO prices in Indonesia are creeping up. There were times when domestic prices in the country were higher than international prices. A few of the palm oil refiners are giving rebates and sharing some of their margins with the upstream players.  

- FFB production growth to remain positive this year but could slow in FY13F. The plantation companies we visited are expected to record FFB production growth of 15% to 20% in FY12F. However according to one of them, there is risk that FFB output growth for Indonesia, would ease in 2013F due to the fall in new plantings in 2009. Based on the size of new plantings by five major players in Indonesia, their new plantings fell about 30% from 2008 to 2009.      

- Positive on the plantation sector. In conclusion, we continue to overweight the plantation sector. We believe that CPO prices are close to bottoming. We think that CPO prices would improve in the coming months as festive-driven demand would help absorb an increase in CPO production in 3Q2012. In terms of stock picks, we like Genting Plantations for its double-digit FFB production growth from Indonesia and well-managed plantation operations. We also favour small-caps like TSH Resources and IJM Plantations.

Source: AmeSecurities