Palm oil prices are finding support from the recent changes in biodiesel policies in
Malaysia, Indonesia and the US
. However, plantation stocks’ share prices have
hardly moved as the market is still skeptical over the implementation of a higher
biodiesel blend mandate and the El Nino factor.
We are taking the market’s
conservative approach and maintain MARKET WEIGHT. However, we see good
value in our preferred picks - FR and BAL - even without the El Nino.
• Edible oil prices finding support from recent changes in biodiesel policies. Crude
palm oil (+10% from recent low on 29 Apr 15) and soybean oil prices (+7% from recent
low on 31 Mar 15) recovered thanks to the recent biodiesel policies changes in
Indonesia, Malaysia and US. All three countries announced higher usage of biodiesel for
domestic diesel mixes. Palm oil and soybean oil are major feedstock for these markets.
• But market is not convinced. Despite the recovery of edible oil prices, share prices of
plantation companies hardly performed, with the exception of First Resources after the
sharp sell down and Eagle High Plantation after the high valuation stakes disposal news.
Feedback from our discussion with clients highlight:
a) lack of confidence that the higher
biodiesel blending can be implemented given the delays in Indonesia and automotive
companies raising concerns on Malaysia’s plan to up blending from B5 to B10.
Meanwhile, in the US, the new proposal on renewable energy use remains unclear. The
final decision will be made by Nov 15,
b) after being fooled in 2014, investors are not
counting on the El Nino factor now as weather in this region is still relatively wet (dryness
usually occurs before an El Nino event).
• What needs to be done for the market to be convinced? In our view, the following
events need to happen before the market regains investor confidence on tighter supply in
the coming years.
- El Nino – Staying cool before the heat comes. Actual dryness needs to happen to
see a rush into the market. Actual dryness is the best evidence as it marks the coming
of an El Nino and this is likely to happen only in Sep/Oct 15.
- Biodiesel – Show me the volume! The market is waiting for the execution of
biodiesel purchases from Pertamina. With the current policy structure, biodiesel
producers are more than happy to supply, but without the purchase from Pertamina
nothing will translate into dollars and cents. Malaysia is too small to influence the
balance of global supply and demand.
• Crude oil prices. Non-mandated biodiesel demand will return if crude oil prices recover
above US$80/bbl. Biodiesel usage is now at about 16% of total palm oil consumption
(9.5m tonnes). Out of this, discretionary demand (subject to crude oil price) took up about
• Possibility of El Nino. El Nino conditions will lead to severe drought in Southeast Asia.
Although the El Nino phenomenon has been confirmed, its severity has yet to be
determined. If it is strong, CPO prices could rally above our expectation.
• CPO price assumptions of RM2,200/tonne for 2015 and RM2,300/tonne for 2016.
• Maintain MARKET WEIGHT. CPO prices are likely to stabilise at the current level of
RM2,100-2,300/tonne pending the implementation of Indonesia’s new export levy,
biodiesel blending and development of El Nino.
• Sector to be re-rated in the event of a strong El Nino. If the El Nino turns out to be
strong, the sector will be re-rated to 1SD above valuations. In the event of an El Nino, all
plantation stocks will move but the following might see greater returns:
a) Highest upside based on re-rated PE: Bumitama Agri (BAL SP), Indofood Agri
Resources (IFAR), Golden Agri Resources (GGR SP) and First Resources (FR SP).
Refer to table on the side.
b) Highest beta to CPO prices: GGR, Sampeorna Agro’s (SGRO) and London
Sumatra’s (LSIP) share prices have the highest beta to CPO prices and tend to move
in tandem with CPO prices.
• Pullback of biodiesel policy
. A pullback in terms of reduction in biodiesel blending
volume will dent CPO prices as the extra supply will need to find new homes within a
short period of time and this might not be easy. (Read Report)
Source : UOB KayHian Research
Labels: Bumitama Agri Ltd, CPO, First Resources, Palm Oil