Subtle Movement
Oversupply Continues in FY17 while the Industry Has Started to Show Recovery
Up to FY17, global CPO production still reveals oversupply, with 6.76 million MT, or 9.66% of global CPO production. This percentage increased significantly when compared to FY16, which only reached 5.01 million MT or 7.71% of global CPO production. This increase is due to the fact that CPO production is recovering as a result of weather normalization after the El Niño phenomenon, extending from late 2016 to August 2017. Throughout 2017, the palm oil industry showed recovery on both domestic and global markets. The observed agricultural sector, accounting for Indonesian economic growth in FY17 increased by 3.81% YoY.
Potential Increase in Domestic Consumption Becomes a Positive Catalyst
Domestic consumption of palm oil is expected to increase, in line with Indonesia's economic growth, estimated at 5.3% in FY18E. We estimate the potential for an increase in domestic consumption to reach 16.5% YoY in FY18E supported by: 1) the holding of several major national and international events; 2) CPO also fulfils needs of government biofuel programs. We expect CPO prices to move in the range RM2,400 - RM2,800 on FY18E.
Concern of USA and Europe Black Campaign
Allegations of Anti Dumping for Indonesia are a negative factor to be considered, however
Government and business actors Indonesia biodiesel industry managed to win an appeals degree in the European Union (EU) Court in the case of imposition of Antidumping Import Duty (BMAD).
NEUTRAL Recommendation with Top Picks: LSIP
We still maintain NEUTRAL outlook for plantation sector in FY18E. We predict the plantation sector will stagnate as there is still oversupply, with production potential increased, supported by La Niña. We recommend a NEUTRAL rating for the plantation sector, with our main stock picks are LSIP (BUY; TP: Rp1,600) with the increasing in nucleus FFB production and good performance during the year. Our TP implies FY18E EV/EBITDA 5.41x.
