Tuesday 9 October 2012

Plantation - “Biodiesel light” at the end of the tunnel?


According to  Reuters, Tan Sri Bernard Dompok mentioned that Malaysia and Indonesia had agreed to reduce oil palm plantation expansion and to increase palm oil consumption in Malaysia by promoting biodiesel  usage. The objective is to prevent further declines in CPO prices. In addition, he was quoted as saying that the Malaysian cabinet will discuss possible changes to its CPO export tax regime in a meeting on Friday. The news is positive to CPO prices as the decision to reduce oil palm plantation expansion will reduce the global CPO supply from 2015 onwards. For the immediate term, the CPO outlook also looks better as additional CPO usage by the local biodiesel industry should result in a lower inventory. That said, the upcoming MPOB inventory level should see it reaching an all-time high of 2.43m mt, hence capping any strong price upside potentials. We are maintaining our NEUTRAL call on the Plantation sector with our  average CPO price estimates for CY12-CY13 remaining unchanged at RM3,150-RM3,100 per mt. Our top picks are TSH (OP; TP: RM2.95) and UMCCA (OP; TP: RM8.05) for their double-digit FFB growth prospects. We maintain meanwhile MARKET PERFORM calls on SIME (TP: RM10.30), IOICORP (TP: RM5.25), KLK (TP: RM24.86),  GENP (TP: RM9.70) and IJMP (TP: RM3.65), and an UNDERPERFORM call on TAANN (TP: RM3.75) due to its timber division weakness.

Reducing oil palm plantation expansion and increasing biodiesel usage. According to Reuters, Tan Sri Bernard Dompok mentioned that Malaysia and Indonesia had agreed to work together to prevent further declines in CPO prices. The cooperation include reducing oil palm plantation expansion and to increase palm oil consumption in Malaysia by promoting biodiesel usage. In addition, Tan Sri Bernard Dompok said that the Malaysian cabinet would discuss possible changes to its CPO export tax regime in a meeting on Friday. Recall that last Friday, Malaysia had delayed taking a decision on a proposal to cut CPO export taxes to 8-10% from the current level of 23% as the cabinet needed more time to study the plan.

Good news for CPO price in the longer term.  As Malaysia and Indonesia account for ~87% of the global CPO supply, we believe that the decision to reduce the oil palm plantation expansion will reduce the global CPO supply from 2015 onwards as oil palm trees need about 3 years before they can start producing FFBs. The CPO shorter term outlook also looks better as additional CPO usage by the local biodiesel industry should result in a lower inventory. Assuming the current Brent crude oil price of US$112 per barrel can be sustained, CPO conversion into biodiesel is economically feasible with a breakeven cost of ~RM2,300 per mt based on our estimate. Hence, we believe that CPO prices are almost close to reach their floor levels as any drops beyond this price will result in it being channeled to biodiesel usage.

However, the upcoming MPOB inventory level should reach an all-time high of 2.43m mt.  We believe that Malaysia’s CPO inventory for Sep-12 (to be released tomorrow) could increase 15% MoM as we expect the CPO production of 1.83m mt to continue exceeding the export volume of 1.46m mt. We have assumed the production to increase 10% MoM in line with the seasonally higher production this month with a higher number of harvesting days after the Hari Raya holidays in Aug-12. Meanwhile, exports growth MoM should be weak at 2% MoM as demand remains sluggish due to the slower economic growth in the major CPO consuming countries such as China and India. Hence, although the above news of the collaboration between Malaysia and Indonesia is positive to CPO prices, the upside could be capped if the MPOB inventory level turns out to be higher than expected.

Prefer young planters, top picks are TSH and UMCCA. We are maintaining our NEUTRAL call on the plantation sector but prefer young planters such as TSH and UMCCA. The average age profile for TSH and UMCCA are at 6.2 and 7.6 years old respectively, which are the youngest among pure planters under our coverage. Due to their high percentage of plantation lands coming into maturity, we expect the double-digit FFB growth rate for TSH and UMCCA to be sustained.

Source: Kenanga

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