Plantation - Key Takeaways from MPOB Palm Oil Seminar
Author: kiasutrader | Publish date: Wed, 18 Jan 2017, 10:13 AM
We attended the MPOB Palm Oil Economic Review and Outlook Seminar 2017 where the 2016 CPO average price was announced at RM2,653/MT, 2% higher than our forecasted RM2,600/MT and 5% above consensus RM2,520/MT. Speakers were largely in agreement with the consensus expectation of stronger 1Q17 prices (up to RM3,400/MT) and weaker 2H17 prices (down to RM2,200/MT) on production recovery. Malaysian production is expected to recover 9-12% while Indonesian production could rise 7-18%. Biodiesel programs should continue supporting CPO prices, though we think non-subsidized production could remain weak on large CPO-Brent premiums. We maintain our NEUTRAL call but near-term POSITIVE view with unchanged 1Q17 CPO trading range of RM2,900-3,300/MT and FY17E average of RM2,500/MT. Our TOP PICK is TAANN (OP; TP: RM5.00) as a double beneficiary of higher CPO prices and stronger USD/MYR, while we also like laggard pure plays such as IOICORP (OP; TP: RM5.15) and young planters. IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.11). Other calls and TP are maintained, namely OUTPERFORM on HSPLANT (TP: RM3.00); MARKET PERFORM on SIME (TP: RM8.60), KLK (TP: RM26.00), PPB (TP: RM16.75), FGV (TP: RM1.72), TSH (TP: RM2.12), and CBIP (TP: RM2.10); and UNDERPERFORM on GENP (TP: RM10.90).
2016 average price of RM2,653/MT above expectations. We attended the MPOB Palm Oil Economic Review and Outlook Seminar 2017, which was well attended by some 370 participants across the industry. At the seminar, MPOB Director General Dr Ahmad Kushairi Din announced the average CPO price for 2016 of RM2,653/MT, which was 2% above our forecasted RM2,600/MT and 5% above the consensus average of RM2,520/MT. This was a strong 23% rebound from 2015 average of RM2,154/MT due to tighter supplies on the back of weaker production on 2015 droughts.
Short-term optimism, but expect 2H17 price weakness. The speakers were in agreement with the near-term positive CPO price outlook, which is likely to fade by 2H17. Mr Ling Ah Hong (Director, Ganling Sdn. Bhd.) noted that production is likely to weaken in 1Q17 on lingering drought effect with recovery only in 2H17, hence likely supporting prices up to a peak of RM3,400/MT during the quarter. Meanwhile, all speakers concurred that the widely expected production recovery in 2H17 will likely lead to a price decline, with a general consensus of a bottom near RM2,200/MT from Mr Ling and Dr James Fry (Chairman, LMC International Ltd.). This is largely in line with our in-house view of a higher 1Q16 trading range between RM2,900-3,300/MT but a full-year average of RM2,550/MT indicating lower CPO prices in later quarters as production improves.
Production to recover. With fading drought impact, speakers reiterated the sector-wide consensus of production recovery in 2017. Dr. Ahmad Kushairi shared MPOB’s 2017 production forecast of +12% to 19.4m MT, while Mr Ling expects a more conservative improvement of +9% to 18.9m MT. We note that our expectation of 11-12% improvement is closer to MPOB’s forecast. Meanwhile, Dr. Fadhil expects Indonesian production to recover to 32-33m MT (+7-16%) from 28.5-30m MT, while Mr Ling expects Indonesian production to rise 18% on both drought recovery and maturing of younger areas.
Support from biodiesel. Dr Fry and Dr. Mohd. Fadhil Hasan (Executive Director, GAPKI) both brought up the Indonesian biodiesel fund (BPDP) which collects a USD50/MT levy on palm oil exports, which is used to subsidise biodiesel production. Assuming crude oil prices average USD50/barrel (bbl), Dr Fry estimates 2.00m MT of CPO can be funded at a CPO price of USD745/MT. Meanwhile, Dr. Fadhil mentioned that target absorption in 2017 is 5.50m kiloliters (kl) (4.84m MT) of which 3.00m kl (2.64m MT) is PSO (public service obligation; or subsidized), and 2.50m kl (2.20m kl) non-PSO. Assuming 2017 collection of USD950m, we estimate potential subsidized biodiesel production at 3.17m kl (2.80m MT), but non-subsidized production is likely to remain weak considering the relatively large CPO-Brent premium of c.USD330/MT currently.
Reiterate NEUTRAL; near-term POSITIVE. We maintain our short-term positive stance on the sector and reiterate our view that planters’ share prices have yet to fully reflect the substantial CPO price gains in 4Q16. Our 1Q17 CPO trading range is RM2,900-3,300/MT while FY17E average CPO price is RM2,550/MT. Near-term prices are supported by the expected production decline up to Feb 2017, while depleted stocks are likely to remain under the 2.0m MT mark throughout 1Q17. External factors are also supportive, such as stronger USD, better crude oil prices, and sustained high soybean oil (SBO) prices. However, weak demand from key markets (due to higher CPO price and SBO competition) could limit price upside. Our TOP PICK is TAANN (OP; TP: RM5.00) as we believe the high CPO price and USD/MYR benefits both its Palm Oil and Timber businesses, while offering a decent dividend yield of 3.6%, one of the higher yields in the sector. We also like laggard pure plays such as IOICORP (OP; TP: RM4.39), and younger planters IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.11) for its young area in Kalimantan which appears to be seeing faster production recovery compared to Malaysian areas.
Source: Kenanga Research - 18 Jan 2017