- CPO prices have bottomed. We believe that CPO prices are
poised for a recovery in 2H2012, underpinned by festive-driven demand and a low
output season in 4Q2012.
- Soybean prices are also expected to remain resilient,
aided by risk that soybean production in the US would be affected by the
drought. According to USDA’s (US Department of Agriculture) latest forecast,
soybean inventory in the US is envisaged to fall 31% from 210mil bushels in
2011/2012F to 145mil bushels in 2012F/2013F.
- On the supply side, palm oil is entering the peak season
in 3Q2012. However, there are two mitigating factors. Firstly, there is a
possibility that production growth in 3Q2012 may not be exciting due to the
high-base effect last year. CPO production in Malaysia climbed 14.4% YoY in
2H2011. Secondly, Hari Raya Puasa is taking place a month earlier this year,
i.e. in August instead of September. This coupled, with the Mooncake
Festivities in September, would help absorb any huge increase in production and
ease the country’s inventory. Presently, industry experts are forecasting that
palm oil production growth in Malaysia would be zero to 3% in 2012F. Palm oil
output growth in Indonesia is expected to expand by 5% to 6% this year.
- The strength in palm oil demand is reflected in the 4.8%
MoM expansion in exports from Malaysia in May 2012. Also according to
independent cargo surveyors, palm oil exports from Malaysia expanded 4.9% to
9.7% MoM in June 2012. SGS reported that exports to Pakistan and India rose
35.3% and 12.9% MoM in June 2012.
- Price discount between CPO and soybean oil still
compelling. CPO price is still attractive relative to soybean oil. This should
encourage further switching from soybean oil to CPO. Currently, the price
discount between the two commodities is 16%, which is in line with the
five-year average. In May, the price discount was narrower at 10.9%.
- Top pick is IJM Plantations. We like IJMP for its future
profit growth coming from Indonesia. IJMP is expected to enjoy a double-digit
percentage increase in its FFB production annually in the coming years.
According to Bloomberg consensus estimates, IJMP is currently trading at
undemanding multiples of 13x to 14x of FY13F and FY14F earnings. This is
mid-way of the group’s historical PE band. IJMP’s average PE was 18x in the
past seven years. We have assumed a PE of 16x to arrive at IJMP’s fair value of
RM3.65/share.
- In terms of yields, we like Kulim, which would be paying a
special dividend of 80-93 sen/share. We think that the special dividend would
be paid in 3Q2012. Besides Kulim, TH Plantations’ dividend yields are also
consistently high, ranging 4% to 5% every year. TH Plantations has an official
dividend policy of 50% of annual net profit.
Source: AmeSecurities
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