Plantation - Key takeaways from MPOB seminar

We attended MPOB’s “Palm Oil Economic Review and Outlook Seminar 2013” on 14 Jan 2013. Among the information released at the seminar was the average 2012 CPO price recorded of RM2764/mt. This is below both the consensus and our estimates of RM3000/mt and RM2900/mt, respectively. We believe this was caused by the extremely low average CPO price achieved in 4QCY12 of RM2170/mt in tandem with the record high palm oil inventory level in the quarter. This strengthens our view that the upcoming Feb earnings result season will be a major disappointment as earnings are likely to continue to trail the consensus estimates. On the price forecast, two experts shared their views. SIME’s Head of Strategy and Business Development Department, Mr Mustamir Mohamad is of the view that CPO prices should recover to the range of RM2500-RM2800 per mt by end-Jun due to the seasonally lower CPO production in the 1H of the year. Director of Ganling Sdn. Bhd, Mr Ah Hong Ling meanwhile opined that CPO prices will stage a short term recovery in 1H13 to RM2800 per mt but 2H13 prices should be lower and to hover between RM2400-RM2600 per mt. Our current CPO price estimate is higher at RM2850/mt for 2013 due to our estimate of a lower CPO inventory. However, we are likely to downgrade our CPO price estimate if the inventory level stays above 2.0m mt for another two months. We are maintaining our UNDERWEIGHT call on the plantation sector based on the reasons stated above and keeping our UNDERPERFORM calls on IOICORP (TP: RM4.40), KLK (TP: RM20.00), GENP (TP: RM8.30), IJMP (TP: RM2.70) and TAANN (TP: RM2.90) due to the low CPO price outlook. Our MARKET PERFORM calls are unchanged on SIME (TP: RM9.00), FGVH (TP: RM4.40), TSH (TP: RM2.22) and UMCCA (TP: RM7.00). Our only OUTPERFORM call is PPB (TP: RM14.38) as we expect it to benefit from Wilmar’s earnings recovery due to the expected turnaround in its soybean crushing margin and a better palm oil downstream margin.

2012 CPO price was below the consensus estimate.  We attended MPOB’s Palm Oil Seminar on 14 Jan 2013 under the theme of “Palm Oil Economic Review and Outlook Seminar 2013”. The event was attended by about 200 participants from various backgrounds such as upstream planters, downstream players and government representatives from Malaysia and Indonesia. In the seminar, MPOB announced that the  average CPO price in 2012 was at RM2764/mt. This is below both the consensus and our estimates of RM3000/mt and RM2900/mt respectively. We believe this was caused by the extremely low CPO price achieved in 4QCY12 at RM2170/mt in line with the record high inventory in the sector. This also strengthens our view that the upcoming Feb earnings season will be a major disappointment as earnings are likely to continue to trail the consensus estimates.

Good 2013 CPO production to limit any price upside. MPOB has estimated the 2013 CPO production at 18.9m mt, a slight increase from 2012’s 18.8m mt. We meanwhile have an estimate of 19.0m mt, slightly higher than the MPOB’s figure (18.9m mt) as we believe that the good weather condition in 2011 and 2012 should result in a better FFB yield this year. On the overall, the good CPO production should limit the upside for CPO prices ahead.

CPO price to trade in the range of RM2400/mt to RM2800/mt only. Two speakers provided CPO price forecasts in the seminar. The first was from SIME’s Head of Strategy and Business Development, Mr Mustamir Mohamad. He was of the view that CPO prices should recover to the range of RM2500-RM2800 per mt by end-Jun due to the seasonally lower CPO production in 1H13. Meanwhile, Director of Ganling Sdn. Bhd., Mr Ah Hong Ling ,who is also the ex-Executive Director of IJM Plantation and has more than 30 years of research experience in plantation crop research, opined that CPO prices will stage a short term recovery in 1H13 to RM2800 per mt as demand from biofuel kicks in and as the current CPO discount to soybean oil shrinks. He added, however, that 2H13 prices should be lower and to hover between RM2400-RM2600 per mt as the high crop production season starts. Assuming the highest price to be achieved is RM2800, the 2013 average CPO price could thus likely to be only in the range of RM2500-RM2700 per mt.

Source: Kenanga