Plantation Sector Update 16 November 2020

PLANTATION SECTOR UPDATE

Hitting Bulls Eye!

CPO Price reach the Highest in 8 Years!

•  CPO price has reached RM3.380/ ton which hiked by 30.70% YoY/13.61% MTD. The current price being the highest in 8 years after a deep contraction earlier this year.
•  On the other hand, soybean oil price movement seemed to followed suit, standing at USD818.72/ton (+11.87% MTD). Though usually the soybean oil price swing is more aggressive as seen in exhibit 02, but lately soybean has been more lagging as demand remains strong for CPO.
•  Deemed as a cyclical commodity, CPO usually rises at the end of the year, shown in exhibit 05. 4Q is the usual high season while in the past two years the incline is rather strong with an average of 12% MoM.
•  MNCS revises the average CPO price estimate to reach RM2,900 (vs average YTD FY20 at RM2,582) by the end of FY20E and RM3,200 in FY21F (from previously RM2,700/RM2,900 in FY20E/FY21F) as it adjusted to the La Nina phenomenon while the blue sky scenario for CPO price is at RM4,330 from the highest spot in 2008.

Malaysia’s CPO is on Shortage

•  La Nina is predicted to last from December 2020 to February 2021 (exhibit 01) but the impact has been perceived since October 2020. This is reflected on a deep contraction on Malaysia’s CPO inventory by –21.74% YTD/ - 33.11% YoY in 10M20 being the lowest in 3 years which led to the rise on commodity price.
•  Meanwhile, Malaysia’s production is no different, dropping by –3.98% YoY/-7.75% MoM in 10M20 (exhibit 04) as opposed to Indonesia’s reported production in 8M20 which still rose by 2.28% YoY/ 13.74% MoM which will be of advantage as inflow demand shifts to Indonesia.
•  However, export from both countries still declined by –14.86% MoM/-11.51% MoM in 8M20 for Indonesia and Malaysia perhaps due to uncertainty but we believe demand will rise entering the 4Q20 as Diwali occurred on November 14, 2020 taking into accounts that India is currently the major importer.
•  Subsequently, La Nina effect tend to cause a CPO shortage when demand increase, this will tip the balance resulting in the hiking CPO price which happens at the present.

Positive Pulses for the Plantation

•  Aside from the wet season, the optimism brought by the vaccine progress also affected the demand to recover as the market expects economy will gradually return to normal along with the vaccination.
•  The US election, in which Biden emerge as the winner, has also bring more positive pulses into the plantation industry. Biden is a notable green energy supporter, as it is included in his campaign and future work program. The support will push CPO price and demand further as request for fossil fuel substitute will go uphill.
•  Furthermore, domestic CPO absorption will increase as it accounted for around 40% of the total domestic consumption in FY19 (Fitch estimates) with the continuation of B30 program in FY20E and FY21F.

Overweight Outlook with Preferred Stock AALI (HOLD; TP: IDR11,800) and LSIP (BUY; TP: IDR1,250)

Our recommendation remains on an OVERWEIGHT outlook for plantation sector with the positive sentiments above. However, we decide to revise our Target Price for LSIP from IDR1,100 to IDR1,250 with BUY recommendation for the following reasons: 1) LSIP stock price movement is more sensitive to CPO price (exhibit 02 & exhibit 07) which we believe there is still a potential upside following the commodity price uptrend; 2) Maintaining zero debt position; 3) Attractive valuation at –1STD with PBV at 0.86x (5-year average). While we maintain target price for AALI (HOLD; TP: IDR11,800) due to slack in CPO production. AALI is currently traded at –0.77STD (5-year average) with PBV at 1.13x

Disclaimer On

AALI, LSIP