MARKET DEVELOPMENT
MIDF Research : CPO Price to Surge Above RM2,500 Next Year Due to Weak Ringgit
MIDF Research : CPO Price to Surge Above RM2,500 Next Year Due to Weak Ringgit
15/12/2015 (The Star) - MIDF Research expects crude palm oil (CPO) prices to benefit from the weak ringgit and surge above RM2,500 per tonne in first quarter of 2016
In a report on the plantation sector today, the research house said although ringgit had appreciated slightly to the level of RM4.30 recently against the dollar, it was still significantly weaker than last year's level of about RM3.50.
“We believe that weak ringgit should lead to improved CPO competitiveness against other vegetable oil especially soybean oil (SBO),” it said, adding that it has maintained a “positive” rating on the sector.
The benchmark CPO futures for third-month delivery is down RM9 from yesterday's close to RM2,465 per metric tonne as at 1130AM today. It had reached RM2,500 per metric tonne last Friday.
As a result of improved demand prospect and weakened production outlook, SBO prices has surged 17% over the past three weeks to a recent high of 32.08 US cents per pound (or US$707 a tonne).
Over the same period, CPO prices gained by only 3%, the research house noted.
“We believe that the slower price appreciation of CPO is due to ample inventory for CPO at this juncture. However, the supply fundamentals are likely to change in the next three months as lagged impact from El Nino kicks in. Note that palm oil tree usually produce less fresh fruit bunches (FFB) 6 to 9 months after the dry spell,” MIDF said.
The research house expects CPO price to surge above RM2,500 per tonne in the first quarter of 2016 discount shrinks to US$100 per tonne.
“We believe that the current CPO-SBO discount of US$153 per tonne is caused by the high inventory and this should shrink to 12-months average of US$100 per tonne in first quarter 2016 due to reduction in stocks level.
“We expect strong depletion of stocks level for palm oil in the first quarter 2016 due to significantly reduced supply of palm oil as the lagged impact from El Nino is expected to hit during the seasonal low production period. Hence, CPO price should appreciate towards RM2,550 per tonne,” MIDF said.
MIDF's top picks for the plantation sector are IOI Corp (Target price: RM4.95) and Ta Ann (RM6.50).
“Our top pick is IOI Corp due as the stock is due for re-rating after it regained its Shariah funds on 30-Nov, strong earnings growth of 41%year-on-year to RM338mil in 1QFY16 and its earnings profile has the most pure (100%) exposure to palm oil among the big cap index-linked planters,” it said.
MIDF explained that it had removed Sime Darby from our its top pick due to earnings disappointment from its Industrial division.
“We also like Ta Ann due to its strong earnings growth of 38% year-on-year to RM115mil in 9MFY15 and its timber division should benefit from higher us dollar as the division’s product prices are quoted in US dollar,” it added.
In a report on the plantation sector today, the research house said although ringgit had appreciated slightly to the level of RM4.30 recently against the dollar, it was still significantly weaker than last year's level of about RM3.50.
“We believe that weak ringgit should lead to improved CPO competitiveness against other vegetable oil especially soybean oil (SBO),” it said, adding that it has maintained a “positive” rating on the sector.
The benchmark CPO futures for third-month delivery is down RM9 from yesterday's close to RM2,465 per metric tonne as at 1130AM today. It had reached RM2,500 per metric tonne last Friday.
As a result of improved demand prospect and weakened production outlook, SBO prices has surged 17% over the past three weeks to a recent high of 32.08 US cents per pound (or US$707 a tonne).
Over the same period, CPO prices gained by only 3%, the research house noted.
“We believe that the slower price appreciation of CPO is due to ample inventory for CPO at this juncture. However, the supply fundamentals are likely to change in the next three months as lagged impact from El Nino kicks in. Note that palm oil tree usually produce less fresh fruit bunches (FFB) 6 to 9 months after the dry spell,” MIDF said.
The research house expects CPO price to surge above RM2,500 per tonne in the first quarter of 2016 discount shrinks to US$100 per tonne.
“We believe that the current CPO-SBO discount of US$153 per tonne is caused by the high inventory and this should shrink to 12-months average of US$100 per tonne in first quarter 2016 due to reduction in stocks level.
“We expect strong depletion of stocks level for palm oil in the first quarter 2016 due to significantly reduced supply of palm oil as the lagged impact from El Nino is expected to hit during the seasonal low production period. Hence, CPO price should appreciate towards RM2,550 per tonne,” MIDF said.
MIDF's top picks for the plantation sector are IOI Corp (Target price: RM4.95) and Ta Ann (RM6.50).
“Our top pick is IOI Corp due as the stock is due for re-rating after it regained its Shariah funds on 30-Nov, strong earnings growth of 41%year-on-year to RM338mil in 1QFY16 and its earnings profile has the most pure (100%) exposure to palm oil among the big cap index-linked planters,” it said.
MIDF explained that it had removed Sime Darby from our its top pick due to earnings disappointment from its Industrial division.
“We also like Ta Ann due to its strong earnings growth of 38% year-on-year to RM115mil in 9MFY15 and its timber division should benefit from higher us dollar as the division’s product prices are quoted in US dollar,” it added.