Plantation sector: Outperformance to persist

Leonardo Henry Gavaza, CFA
Senior Research Manager
Research Department

The occurrence of El Nino remains in question: SOI (exhibit 1) shows deteriorating signs of an El Nino occurrence, while the Predictive Ocean Atmosphere Model for Australia (POAMA) indicates that an El Nino pattern could occur in 4Q14 (exhibit 2). Although the CPO price has weakened in the past few weeks due to these conflicting signals, we believe that production growth (exhibit 17) should remain limited, irrespective of whether El Nino materializes. This is on the back of unusually dry weather in Malaysia and some parts of Sumatera Island in 1Q14.

In 2014, we expect biodiesel to absorb additional vegetable oil volumes of 2mn tons, of which 1mn tons would be from Indonesian planters. In addition to Indonesia, several countries (Malaysia, Brazil and Argentina) have increased their biodiesel blending requirements. Despite the biodiesel price being uncompetitive at the current CPO price level, we believe a floor price will be supported by improved 2014 biofuel demand, coupled with improved sentiment on the crude oil price from political uncertainties in Iraq.  

CPO price weakness of late could also be attributable to the prospect of record soybean production from the North and South America regions on the back of favorable weather expectations. We also look for significantly higher soybean imports from India and Iran in 2Q14. In 2014, we expect world vegetable oil production to reach 162m tons, up 4.6% y-y.  Based on our data, CPO now trades at a 4% discount to soybean oil, lower than 1Q14’s level of 2% premium, supporting CPO price.

Due to recent CPO weakness, we cut our CPO price expectations to USD915/ton in 2014 (from USD965/ton), up 7.5% y-y, and USD 995/ton in 2015 (from USD1,025/ton), up 8.8% y-y. We also expect a weaker rupiah, to IDR11,900/1USD (from IDR11,300) in 2014 and IDR11,950 (from IDR11,200) in 2015. We also fine-tune our numbers to take into account current production and cost conditions.  

While we maintain our NEUTRAL sector call on conflicting El Nino signals and CPO weakness, the sector has outperformed the market ytd, echoing our positive calls on all of our stocks.  As we roll over our valuation base to 2015, the 2015F PE of 12.5x is undemanding, at a 32% discount to Malaysian peers. We raise ANTJ to BUY and revise our estimates. Our top pick remains AALI due to strong long-term growth on solid new plantings and manageable cost structure. Risks: stronger IDR, lower CPO prices and higher labor/fertilizer costs.