Indonesian plantations sector: Bull & bear factors

At this stage of the market cycle, the Predictive Ocean Atmosphere Model for Australia (POAMA) projects a high El Nino probability. However, we expect the real impact of El Nino on companies’ FFB production to only be felt in 1Q16, suggesting higher CPO prices ahead based on historical record. Note that every 10% higher CPO price would result in 23% higher overall sector EPS growth, based on our study.

Another positive aspect for CPO prices on the ground stem from the government’s plan to increase 2016 biodiesel consumption to 6.14mn kl or 5.3mn tons of CPO, from 1.5mn kl or 1.3mn tons CPO in 2015. Note that we have seen higher domestic CPO consumption starting July (exhibit 1), mainly supported by the government’s B15 program implementation and Hari Raya festivities.

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