PLANTATION - The party may pause for a while

Downgrade the Plantation Sector to NEUTRAL ahead of the expected weak 2QCY12 results, weaker CPO prices outlook and the less likelihood now of a strong El Nino occurring. Out of the seven planters under our coverage who will be releasing their quarterly results in August, we expect five of them to report earnings which will trail the consensus estimates. Hence, we believe the consensus may cut their earnings significantly post-2QCY12, resulting in weaker planters’ share prices. As a result of escalating costs, 2012 average CPO prices have to be higher than RM3300 just to maintain 2011 earnings, a scenario which we think is unlikely. In the near term, the upcoming MPOB’s July inventory data could swell above the psychological range of 2.0m mt. The El Nino threat has also become less severe as the SOI reading has recovered to +0.9 (as of 29 July). We are also downgrading our CY12-CY13 average CPO prices to RM3,150-RM3,100 (from RM3,200 for both years previously) after imputing a lower crude oil price assumption and tweaking our USD/MYR rate assumption in line with our new in-house economic forecast. Downgrade SIME (TP: RM10.30), GENP (TP: RM9.70), IJMP (TP: RM3.65) and TAANN (TP: RM4.60) to MARKET PERFORM. However, we are maintaining OUTPERFORM on TSH (TP: RM2.85) and UMCCA (TP: RM8.05) for their young age profiles, which allow them to enjoy double digit FFB growth. IOICORP (TP: RM5.25) and KLK (TP: RM24.86) are maintained as MARKET PERFORM.

DOWNGRADE to NEUTRAL ahead of expected weak 2QCY12 results. Out of the seven planters under our coverage who will release their quarterly results in August, we expect five of them to report earnings which will trail the consensus estimates. This will likely be due to a lower-than-expected FFB production in 1HCY12 due to the worse-than-expected tree stress condition. Hence, we believe the consensus may cut their earnings significantly post-2QCY12, resulting in weaker planters’ share prices. We have cut our earnings for FY12/13E for all planters under our coverage by 5%-21% after assuming a lower CPO prices and FFB yields.

Average CPO prices have to be higher than RM3300 just to maintain 2011 earnings. Recall that 2011 supernormal profit for planters was achieved at a margin of ~RM2200 per mt of CPO (CPO price at RM3219, cost at RM1000). As the cost per mt of CPO is expected to surge by RM200 to RM1200-RM1300 per mt of CPO, we estimate that CPO prices will need to reach another new high of RM3300 in 2012 for most planters just to maintain their same earnings achieved in 2011. Such a scenario is unlikely in our view and hence there will be comparatively less exciting earnings to be reported for FY12E.

CPO prices may suffer short term pressure as MPOB’s July-12 CPO stocks report could swell above 2.0 mt. We expect July-12 stocks level to surge 16% MoM to 1.97m mt but this could cross the 2.0m psychological range especially if the export numbers turned out to be weaker than expected. We have assumed that CPO exports will tumble by 14% MoM to 1.32m mt while production will grow strongly by 12% MoM to 1.65m mt in July. The July-12 inventory data is expected to be released on 10 Aug 2012. 

Less concerned on El Nino threat. The latest SOI reading of +0.9 (as of 29 July) suggests that a strong El Nino event is now unlikely. In addition, Oil World estimates show that the total production of eight major oils for the 2012/13 season appears to be enough to satisfy demand.

Plantation sector excitement may take a breather.  Potentially weak 2QCY12 results, limited CPO prices upside and a weakening El Nino underpin our decision to downgrade the sector to NEUTRAL for the next three to sixth months. Key catalysts to upgrade the sector again would be a sustained CPO price surge, which could be caused by a QE3 rollout or a sustained weather disruption. Another catalyst for the sector will be the possible removal of the windfall tax in Budget 2013.

Prefer young planters, top picks are TSH and UMCCA. The average age profile for TSH and UMCCA at 6.2 and 7.6 years old respectively, which are the youngest among pure planters under our coverage. Due to the huge amount of plantation lands coming into maturity, we expect the double-digit FFB growth rate for TSH and UMCCA to be sustained.  

Source: Kenanga