Bahana Securities - Crude palm oil: Changing landscape

by Leonardo Henry Gavaza - Bahana Securities Analyst

Favorable third quarter 2013 weather condition in the Northern hemisphere, good planting and growing conditions in South America will result in much higher October 2013 – September 2014 (Oct13-Sept14) soybean output of 284m tons (exhibit 1), up 6.8% y-y based on Oilworld report. 

This condition will result in higher ending stock of 75m tons, up 22% y-y and higher stock to usage ratio of 28% (Oct12-Sept13: 24%).  That said, with Sept13-Oct14 palm oil production also expected to rise 4.4% to 58.2m tons, total 8 vegetable oil supplies will increase 3.4% y-y to 159.5m tons, higher than the increase in consumption of only 3.1% y-y to 158.7m 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 CPO price growth going forward in our view. 



Hence, although oil price has remained above USD100/barrel lately, CPO price will not benefit from such condition as the EU limits the use of CPO for its biodiesel mandate.  Biodiesel production concurrently also experiences limited growth.

With CPO production entering its peak period in 2H13 and slower demand following Lebaran festivities, we expect 3Q13 CPO price to reach USD731/ton, down 13% q-q and 27% y-y, before averaging USD774/ton, down 22% y-y in 2013. 

Sizeable increases in CPO production will push Indonesia and Malaysia CPO inventories in 2014 to another record high, pushing down next year’s CPO price to USD760/ton, down 2% y-y, before slightly recovering in 2015 to USD798/ton, up 5% y-y.  This means 12%-20% downgrades in our 2013-15 CPO price assumptions (exhibit 2), resulting in 14%-51% lower earnings for CPO counters in our coverage, some 30-65% below consensus’ projections.

While benefiting from weaker IDR, CPO companies will see depressed 2013-15 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 PE has reached 16.6x. 

On individual counters, we now have REDUCE ratings on most of our plantation counters with average 16% downside potential on revised down earnings and lofty valuations on unsupportive CPO market. 

Going forward, we expect sector de-rating to 2014 PE of 14.2x, translating to 20% discount to its Malaysian peers, reflecting negative 2013-14 earnings growth.  We have two HOLD ratings on AALI, due to generation of additional earnings from its refinery business starting in 2014, and BWPT on strong earnings recovery helped by the operation of its new mill next year.  On a more negative note, our top sells are SGRO, SIMP and LSIP on weak growth profiles. 

Exhibit 1. Soybean production and consumption

2010-2011
2011-2012
2012-2013
2013-2014F

October-September
Opening stocks
64.7
75.5
54.8
61.7
Production
264.9
240.6
266.0
284.2
  growth (%)
-
(9.2)
10.6
6.8
Production
254.2
261.3
259.2
270.9
  growth (%)
-
2.7
(0.8)
4.5
Ending stocks
75.5
54.8
61.7
75.0
Stock/usage (%)
29.7
21.0
23.8
27.7
Source:  Oil World

Exhibit 2. Current assumptions: CPO & currency, 2011-2015F
Important Facts (Average)
2011A
2012A
2013F
2014F
2015F
Rotterdam CIF CPO price (USD/mtn)
1,111
998
774
760
798
Growth (%)
24.5
(10.1)
(22.4)
(1.9)
5.0
Currency (IDR/USD)
9.027
9,374
10,150
9,850
9,700
Growth (%)
2.3
(3.7)
(7.7)
3.1
1.6