RHB Plantation

8/12/2019 RHB Plantation

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Sector Update, 13 January 2014

Plantation Overweight

Stockpile Hits Seasonal Peak

Macro

Risks

Growth

Value

Average crude palm oil price, MYR/tonne

1,000

1,500

2,000

2,500

3,000

3,500

CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13

Average CPO price, MYR/t

Source: Malaysian Palm Oil Board (MPOB)

Average palm kernel price, MYR/tonne

500

1,000

1,500

2,000

2,500


Average PK price, MYR/t

Source: MPOB

Average refined palm oil price, MYR/tonne

1,500

2,000

2,500

3,000

3,500

4,000


Average RBDPO price, MYR/t

Source: Bloomberg

Alvin Tai, CFA+603 9207 7628

[email protected]

Hoe Lee Leng +603 9207 7605

[email protected]

P/E (x) P/B (x) Yie ld (%)

Dec-14F Dec-14F Dec-14F

Astra Agro Lestari IDR21,350 IDR28,352 13.6 3.0 3.9 BUY

Bumitama Agri Ltd SGD0.95 SGD1.35 11.4 2.3 - BUY

CB Industrial Product Holding MYR3.23 MYR3.88 9.9 1.4 3.1 BUY

Felda Global Ventures Holdings MYR4.50 MYR5.20 22.7 2.4 - BUY

First Resources SGD2.07 SGD2.70 12.0 1.8 2.4 BUY

Genting Plantations MYR10.74 MYR10.90 22.7 2.1 1.0 NEUTRAL

Golden Agri SGD0.53 SGD0.66 14.3 0.6 2.1 BUY

IJM Plantation MYR3.42 MYR2.80 19.3 1.8 2.5 SELL

IOI Corporation MYR4.24 MYR4.83 16.0 3.8 3.7 BUY

JA Wattie TBK PT IDR370 IDR585 8.8 0.9 - BUY

Kuala Lumpur Kepong MYR23.90 MYR24.40 19.0 3.1 3.0 NEUTRAL

Kulim Malaysia MYR3.38 MYR4.22 14.4 0.9 - BUY

London Sumatra Indonesia Tbk PT IDR1,535 IDR2,179 11.3 1.6 2.8 NEUTRAL

Sampoerna Agro IDR1,880 IDR2,775 9.5 1.2 - BUY

Saraw ak Oil Palms MYR6.95 MYR7.12 15.6 1.9 1.1 BUY

TDM MYR0.96 MYR1.04 15.3 1.0 2.5 NEUTRAL

TH Plantations MYR1.85 MYR1.26 23.6 1.4 1.6 SELL

Company Name Price Target Rating

Malaysias palm oil stockpile rose marginally to 1.985m tonnes in Dec

2013 likely to be the seasonal peak. In the months ahead, inventorywill ease, providing a lift for palm oil prices. A stronger price catalyst,however, is in the form of Pertaminas upcoming second biodieseltender. Maintain OVERWEIGHT, with First Resources, Bumitama andAALI as sector Top Picks. Malaysian Top Picks are IOI and SOP.

No surprises. Malaysias palm oil inventory ended at 1.985m tonnes for2013, sharply lower vis--vis end-2012, as export growth outstrippedproduction growth and local consumption surged during the year. .

Prices softened. Palm oil prices have retraced in the past two weeks,as Indonesias mandatory biodiesel programme encountered hiccups,due to pricing issues. Pertamina only managed to secure 18% of the 3mtonnes of biodiesel supply required. The 18% secured is sufficient fortwo months consumption. There is an upcoming second tender, which issaid to be on 21 Jan.

Production weakness more apparent in 2Q. We believe palm oilprices will strengthen progressively throughout 2014 due to lacklustre

production in Indonesia, as a result of rainfall deficit over the past twoyears. We believe more price strength will be seen in the 2Q, asproduction weakness becomes more apparent. Weak 1Q production islikely to be perceived as seasonal in nature.

Indias import tax.India raised its import duty for refined edible oil from7.5% to 10.0% but tax for crude edible oil is unchanged, the impact ofwhich is neutral it will only cause a switch from refined to crude products.

Buying opportunity. We view the price pullback as temporary andprovides a buying opportunity. The main stumbling block for palm oilprices to charge higher at this point in time is the relatively narrowdiscount to soybean oil at USD65 per tonne. On the flipside, this alsomeans there is a USD65 upside for palm oil price before it comes toparity against soybean oil price. As we have seen in 2009 and 2010,

poor palm oil production led to parity price against soyoil.

Source: Company data, RHB estimates


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Plantation13 January 2014

See important disclosures at the end of this report 2

How 2013 played outMalaysias 2013 palm oil production hit its highest level ever at 19.215m tonnes, anincrease of 429,800 tonnes, or 2.3%, from 2012. West Malaysia produced 10.328mtonnes (+0.1% y-o-y), making up 53.8% of total production. Sabah production rose4.2% to 5.776m tonnes, or 30.1% of the countrys production, while Sarawaks outputrose by 6.4% to 3.110m tonnes, or 16.2% of national production.

Within West Malaysia, the three biggest producing states, ie Johor, Pahang andPerak, make up 76% of Peninsula Malaysias production. Surprisingly, only threestates, ie Johor, Pahang and Kelantan, showed production increases, while the otherseven experienced production declines of between 1.7-12.9%.

Malaysias oil yield was marginally better at 3.85 tonnes per ha compared to 3.84tonnes in 2012. Sabah remained as the highest yielding state at 4.40 tonnes (4.29tonnes in 2012).

2013 total palm oil export rose by 3.2% to 18.122m tonnes, also a record high butonly marginally surpassing 2011s 17.982m tonnes level. China remained the largestexport destination with total shipment of 3.700m tonnes, or 20.4% of total exports,

followed by Europe (12.9% of total), India (12.8% of total), Pakistan (7.9% of total)and the US (5.6% of total). Encouragingly, shipments to China rose by 5.6%, Europewas up by 4.9% and Pakistan by 6.3%. However, shipment to India dipped by 11.9%on loss of market share to Indonesia and the US slipped by 1.7%.

Malaysias local consumption rose by 12.1% y-o-y to 2.291m tonnes, driven bybiodiesel consumption. However, local consumption is still significantly off peak of the2.591m tonnes achieved in 2008.

End-2013s 1.985m palm oil inventory was sharply lower than what it was at end-2012, thanks to trade normalisation following the change in Malaysias export dutystructure for CPO and poor production growth in Indonesia. Compared to the trough

level of 1.648m tonnes in June 2013, it was up by 20.5%. We view inventory level asbeing comfortable and should not cause oversupply concerns.

The abovementioned trade normalisation has helped the Malaysian downstreambusiness remain competitive against its Indonesian counterparts. Malaysias refineryutilisation rate improved to 69.7% in 2013 compared to 63.0% in 2012. Oleochemicalplant utilisation also improved to 77.4% compared to 75.9% a year earlier.

Palm oil prices averaged MYR2,375 per tonne, based on the simple average of WestMalaysia MPOB price, or about 1% lower than our MYR2,400 per tonne expectation.On a weighted average basis, based on 43.7% production in the 1H and 56.3% in the2H, average palm oil price was slightly higher at MYR2,380.

Discount to soybean oil widened last year to an average of USD209 per tonne in2013 compared to the USD208 discount in 2012. However, in the 4Q alone, averagediscount was at USD100 per tonne, with the discount reducing to under USD100 inNov 2013 onwards due to the relative ampleness of soybean supply relative to palmoil.

Compared to Brent Crude, palm oil traded at an average of USD4.08 discount perbarrel in 2013, compared to an average premium of USD18.89 per barrel in 2012.The discount to Brent Crude encouraged the use of biodiesel, which helped paredown palm oil inventory in 2013.

Production trend

Production yield

Export trend

Local consumption

Inventory

Downstream performance

Average price

Price spread


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Figure 1: Palm oil's discount to soybean oil is at a narrow USD65 per tonne

-50

-

50

100

150

200

250

300

350

400

450

500

-

200

400

600

800

1,000

1,200

1,400

1,600

Premium, USD (RHS) Soyoil, USD (LHS) CPO, USD (LHS)

Source: Bloomberg

Figure 2: Palm oil is at discount to Brent Crude after the recent decline

-30

-10

10

30

50

70

90

CPO's premium over crude oil Soyoil's premium over crude oil

Source: Bloomberg, RHB estimates

Figure 3: Palm oil against energy benchmarks (USD per barrel)

75

95

115

135

155

175

195

Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Gasoil CPO Brent crude Biodiesel, SEA

Source: Bloomberg


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Figure 4: Palm oil prices vs inventory levels

0

500,000

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2,500,000

3,000,000

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1,000

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4,000

4,500

Dec-01

Jun-02

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Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

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Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Stocks, tonnes (RHS) CPO Price, MYR (LHS)

Source: MPOB

Figure 5: India's import of palm oil largely in CPO form

0

1000

2000

3000

4000

5000

6000

7000

8000

YTD CY07 YTD CY08 YTD CY09 YTD CY10 YTD CY11 YTD CY12 YTD CY13

CPO Ref ined PO Total

Source: India's Customs

Figure 6: Composite fertiliser cost at USD343 per ha

0

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900

Jul-03

Dec-03

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Dec-13

SOA MOP RP Composite cost (FOB) Source: RHB estimates, Indexmundi


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RHB Guide to Investment Ratings

Buy:Share price may exceed 10% over the next 12 monthsTrading Buy:Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertainNeutral:Share price may fall within the range of +/- 10% over the next 12 monthsTake Profit:Target price has been attained. Look to accumulate at lower levelsSell:Share price may fall by more than 10% over the next 12 monthsNot Rated:Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation orwarranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offerto transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared forinformation purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report doesnot have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for theinformation of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal orfinancial advice to independently evaluate the particular investments and strategies.

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12th

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