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Wednesday, March 15, 2017

Plantation (NEUTRAL) - El Nino making a comeback?

Plantation (NEUTRAL) - El Nino making a comeback?

Author: HLInvest   |   Publish date: Wed, 15 Mar 2017, 09:10 AM 

Highlights

  • El Nino returning? Several weather forecasters worldwide (including Australian Bureau of Meteorology, US Climate Prediction Center, etc) predict that an El Nino is set to return and may develop by Jul-17.
  • It is rare that El Nino re-emerges in less than 3 years…and if it does, this would be the first time El Nino making a comeback in less than 3 years after the previous El Nino episode since the early 1960s. Depending on its strength, the El Nino episode will have a detrimental impact on palm production over the next 6-24 months.
     
  • 4 El Nino episodes since 2002… and we note that 3 out of the 4 El Nino events did result in higher CPO prices (see Figure 1).
     
  • Trading opportunities should El Nino re-emerge in 2H. We are maintaining our average CPO price projection of RM2,500/mt for 2017 and 2018 for now, pending for a more convincing data that supports the potential El Nino episode (as well as the strength of it). In the event of major weather disruptions, we believe it is unlikely for CPO price to strengthen significantly higher from current level, given the absence of strong demand growth catalyst for vegetable oils. Nevertheless, we believe the re-emergence of an El Nino does provide trading opportunities. In such instance, we believe focus should be on plantation stocks with liquidity, i.e. FGV (HOLD; TP: RM1.73), Sime Darby (BUY; TP: RM10.06) and IOI Corp (HOLD; TP: RM4.69) , as it is still premature to conclude if there will be a strong El Nino episode).

Catalysts

  • Revisit of weather uncertainties, which would result in supply distortion, hence boosting prices of edible oil.
  • Slower-than-expected recovery in palm production, resulting in palm prices sustaining at high level.

Risks

  • Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
  • Backtracking of biodiesel mandate in Indonesia.
  • Imposition of higher import duty on CPO by India.
  • Escalating production cost (particularly labour cost).

Rating

NEUTRAL ()

  • Maintain average CPO price assumption of RM2,500/tonne for 2017-2018. We maintain our Neutral stance on the sector, as we believe our anticipation of palm oil production recovery will be offset by lower CPO prices (in the absence of significant demand growth catalyst).

Top picks

  • For exposure, our top picks are Sime Darby (BUY; TP: RM10.06) , Hap Seng Plantations (BUY; TP: RM2.89) and CBIP (BUY; TP: RM2.48)
Source: Hong Leong Investment Bank Research - 15 Mar 2017

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