Thursday, 7 March 2013

Plantation - Key takeaways from POC 2013


We attended the annual Palm & Lauric Oils Conference – Price Outlook (POC) 2013 at Shangri-la Hotel in Kuala Lumpur recently. Based on the six speakers who presented their CPO price views, the consensus average was at RM2400 per mt (with the price bands for 2013 ranging from RM1800 to RM3200 per mt). Among the speakers, the most bullish estimate came from MPOC CEO as he believes that CPO prices should trade between RM2500 and RM3200 per mt in 2013 due to his expectation of a lower Stock-Usage ratio for palm oil by end-2013. In contrast, the most bearish prediction came from Dorab Mistry, who predicts that CPO prices would fall below RM2000 per mt in July-Aug 2013. Our average CPO price forecast for 2013 is at RM2500/mt, which is more optimistic than Dorab Mistry as we believe that CPO prices should increase to about RM2700/mt by Jun before bottoming at RM2100/mt in the peak production season in Sep-Oct. We believe that the key variance between our forecast and Dorab’s lies in the price outlook for Brent crude oil. We reiterate an UNDERWEIGHT rating on the sector given that the consensus is still estimating an average 2013 CPO price of RM2950/mt, which we think will lead to more earnings disappointments at least in the next earnings season in May-2013. We maintain UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Our MARKET PERFORM calls are also retained on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery from the turnaround in its soybean crushing and a better outlook for its palm oil downstream.

Consensus CPO price close to RM2400 from POC 2013 speakers. Based on the six speakers who presented their CPO price views during the conference, their forecasts for 2013, range from RM1800 to RM3200 per mt. The average CPO price forecast of RM2398 per mt this year was lower by 23% YoY (against 2012’s forecast of RM3129 per mt). Most of the experts believe that CPO prices should be supported in 1H13 due to the low production season but would trend lower in 2H13 when the high production season starts.

Most bullish estimate from MPOC CEO (Prediction: CPO prices to trade between RM2500-RM3200 per mt in 2013). Malaysia Palm Oil Council (MPOC) CEO, Tan Sri Datuk Dr Yusof Basiron said he believes that the 2013 Stock-Usage ratio for CPO should decline and this should lead to better prices. He also thinks that the current low CPO prices were caused by a temporary supply imbalance, which had been wrongly speculated as reduced demand. He also believes that Malaysian and Indonesian biodiesel programmes could stabilise CPO prices.

The most bearish prediction from Dorab Mistry (Prediction: CPO prices to fall below RM2000 per mt in July-Aug 2013). Godrej International Ltd. Director, Dorab Mistry meanwhile said he believes that CPO prices would tumble below RM2000 per mt but he, however, does not think that it would fall below RM1800 per mt unless Brent crude oil declined to US$80 per barrel. He believes that the August USDA with its estimate of bumper US crop would be bearish to CPO prices. However, Dorab was neutral on near term CPO prices as the low production season should reduce inventories.

What we think? Our average CPO prices forecast for 2013 at RM2500/mt are more optimistic than Dorab Mistry as we believe that CPO prices should increase to about RM2700/mt by Jun before bottoming at RM2100/mt in the peak production season in SepOct. We believe that the key variance between our forecast and Dorab’s is in the price outlook for Brent crude oil. Our in-house economist is projecting WTI crude oil to average US$97.5 per barrel in 2013 (implied Brent crude oil: US$113 per barrel) as he thinks that the global economy should still be growing in 2013 despite being at sub-par growth. We anticipate palm oil demand to pick up in the northern hemisphere during Apr-Sep as the weather warms up. This should allow palm oil to become usable again. Additional demand growth should come in from the biodiesel market too due to its huge discount against Brent crude oil, which makes it economically viable to produce even without government subsidy. However, we are less optimistic than MPOC possibly due to our expectation of a higher stock-usage ratio.

Source: Kenanga

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