MARKET DEVELOPMENT
Analysis: Crude Palm Oil: Changing Landscape
Analysis: Crude Palm Oil: Changing Landscape
02/08/2013 (Jakarta Post) - Favorable third quarter 2013 weather conditions in the Northern hemisphere and good planting and growing conditions in South America will result in much higher October 2013–September 2014 soybean output of 284 million tons (exhibit 1), up 6.8 percent year-on-year (y-y) based on a report by Oilworld.
This condition will result in higher ending stock of 75 million tons, up 22 percent y-y and higher stock to usage ratio of 28 percent (October 2012–September 2013: 24 percent). That said, with September 2013–October 2014 palm oil production also expected to rise 4.4 percent to 58.2 million tons, total 8 vegetable oil supplies will increase 3.4 percent y-y to 159.5 million tons, higher than the increase in consumption of only 3.1 percent y-y to 158.7 million tons.
Other than higher supplies, we see policy risk in India and Indonesia as they continue their fiscal policy war to protect their own refineries. This coupled with the above-mentioned factors will limit crude palm oil (CPO) price growth going forward in our view.
Hence, although oil has remained above US$100/barrel lately, CPO price will not benefit from this condition as the EU limits the use of CPO for its biodiesel mandate. Biodiesel production is concurrently also experiencing limited growth.
With CPO production entering its peak period in the second half of 2013 and slower demand following Lebaran, we expect CPO in the third quarter of 2013 to reach $731/ton, down 13 percent quarter-on quarter (q-q) and 27 percent y-y, before averaging $774/ton, down 22 percent y-y in 2013.
Sizeable increases in CPO production will push Indonesian and Malaysian CPO inventories in 2014 to another record high, pushing down next year’s CPO price to $760/ton, down 2 percent y-y, before slightly recovering in 2015 to $798/ton, up 5 percent y-y. This means 12 percent-20 percent downgrades in our 2013-15 CPO price assumptions (exhibit 2), resulting in 14 percent-51 percent lower earnings for CPO counters in our coverage, some 30-65 percent below consensus’ projections.
While benefiting from the weaker rupiah, CPO companies will see depressed 2013-2015 earnings on lower CPO price and higher labor costs. Thus, we cut our sector rating on plantations from neutral to underweight on continued negative developments within the industry, particularly as 2014 Price Earning (PE) has reached 16.6 times.
On individual counters, we now have “reduce” ratings on most of our plantation counters with average 16 percent downside potential on revised down earnings and lofty valuations on unsupportive CPO market.
Going forward, we expect sector de-rating to 2014 price-earnings (PE) of 14.2 times, translating to 20 percent discount to its Malaysian peers, reflecting negative 2013-14 earnings growth. We have two “hold” ratings on Astra Agro Lestari Tbk (AALI), due to generation of additional earnings from its refinery business starting in 2014, and BW Plantation (BWPT) on strong earnings recovery helped by the operation of its new mill next year. On a more negative note, our top sells are Sampoerna Agro (SGRO), Salim Ivomas Pratama (SIMP) and London Sumatra Indonesia Plantation (LSIP) on weak growth profiles.
The writer is an analyst at PT Bahana Securities
This condition will result in higher ending stock of 75 million tons, up 22 percent y-y and higher stock to usage ratio of 28 percent (October 2012–September 2013: 24 percent). That said, with September 2013–October 2014 palm oil production also expected to rise 4.4 percent to 58.2 million tons, total 8 vegetable oil supplies will increase 3.4 percent y-y to 159.5 million tons, higher than the increase in consumption of only 3.1 percent y-y to 158.7 million tons.
Other than higher supplies, we see policy risk in India and Indonesia as they continue their fiscal policy war to protect their own refineries. This coupled with the above-mentioned factors will limit crude palm oil (CPO) price growth going forward in our view.
Hence, although oil has remained above US$100/barrel lately, CPO price will not benefit from this condition as the EU limits the use of CPO for its biodiesel mandate. Biodiesel production is concurrently also experiencing limited growth.
With CPO production entering its peak period in the second half of 2013 and slower demand following Lebaran, we expect CPO in the third quarter of 2013 to reach $731/ton, down 13 percent quarter-on quarter (q-q) and 27 percent y-y, before averaging $774/ton, down 22 percent y-y in 2013.
Sizeable increases in CPO production will push Indonesian and Malaysian CPO inventories in 2014 to another record high, pushing down next year’s CPO price to $760/ton, down 2 percent y-y, before slightly recovering in 2015 to $798/ton, up 5 percent y-y. This means 12 percent-20 percent downgrades in our 2013-15 CPO price assumptions (exhibit 2), resulting in 14 percent-51 percent lower earnings for CPO counters in our coverage, some 30-65 percent below consensus’ projections.
While benefiting from the weaker rupiah, CPO companies will see depressed 2013-2015 earnings on lower CPO price and higher labor costs. Thus, we cut our sector rating on plantations from neutral to underweight on continued negative developments within the industry, particularly as 2014 Price Earning (PE) has reached 16.6 times.
On individual counters, we now have “reduce” ratings on most of our plantation counters with average 16 percent downside potential on revised down earnings and lofty valuations on unsupportive CPO market.
Going forward, we expect sector de-rating to 2014 price-earnings (PE) of 14.2 times, translating to 20 percent discount to its Malaysian peers, reflecting negative 2013-14 earnings growth. We have two “hold” ratings on Astra Agro Lestari Tbk (AALI), due to generation of additional earnings from its refinery business starting in 2014, and BW Plantation (BWPT) on strong earnings recovery helped by the operation of its new mill next year. On a more negative note, our top sells are Sampoerna Agro (SGRO), Salim Ivomas Pratama (SIMP) and London Sumatra Indonesia Plantation (LSIP) on weak growth profiles.
The writer is an analyst at PT Bahana Securities