NEVER TOO EARLY
Industry Has Started to Show Recovery
Indonesian palm oil production recorded a growth of 14.17% YoY to 4.28 million tons in 7M18. This shows a continuous excess supply in Indonesia up to 7M18, as evidenced by total domestic consumption which reached only 1.01 million tons, or far less than the total production. Indonesia's CPO export performance recorded a 26.98% YoY increase in 7M17, reaching 2.53 million tons, up to 4.28 million tons in 7M18.
Potential Payoff from Trade War and Increase in Domestic Consumption Becomes a Positive Catalyst
Trade tensions between the US and China have heated up considerably following the imposition of tit-for-tat import tariffs by each country.Indonesia benefits from increasing demand for CPO from China due to the Trade War.Domestic consumption of palm oil is expected to increase in FY19F. We estimate the potential for an increase in domestic consumption in FY18E/FY19F supported by enactment of mandatory b20. In addition, the Biofuel program enacted by the government, as well as the development of CPO-based downstream industries, illustrates how the need for palm oil has a potential to grow 15.40% to 12.76 billion tons.We expect CPO prices to move in the range RM2,300 - RM2,600 in FY18E and RM 2,100-2,300 in FY19F.
Risks from CPO Import Restrictions imposed by the EU and US
Several regulations implemented by CPO-importing countries such as the EU and the US, related to restrictions on palm oil-based products, are certainly a challenge for the Indonesian CPO sector. The impact of the policy has begun to be seen from Indonesia's palm exports experienced a decline to the country
NEUTRAL Recommendation with Top Picks: LSIP and AALI
We still maintain a NEUTRAL outlook for the plantation sector for FY18E / FY19F. We predict the sector has a potential to stay stagnant until the end of 2018. Nevertheless, we see investment opportunities in 2019, along with relatively cheap (undervalued) valuations today, following negative issues that have emerged and are reflected in the current share price decline. We believe that positive issues, either in terms of increasing demand or decreasing inventories due to weather factors will be an interesting turnaround story going forward. We recommend LSIP (BUY, TP: IDR1,540) because of its healthy balance sheet, and AALI (HOLD, TP: IDR14,125) because of the opportunity for increased CPO demand from the implementation of B20.
