Anticipating an El Nino-Fueled Rally
Key Takeaways:
▪️ NOAA's latest assessment of the SST trends in the Nino-3.4 region portends a >55% chance for a strong El Nino to persist in Jan-24 to March-24, from what was initially expected to be just a moderate El Nino. we expect Indonesian CPO output to further slide upon entering 2H24, possibly up to 1Q25.
▪️ We view that the threat of dwindling CPO output in FY24F has a great chance of driving prices higher on the back of solid demand, possibly within the range of MYR3,900-4,150/ton.
▪️ Going into FY24F, we expect fertilizer costs to ease; prices have slid down from its 2022 highs and are set to tread around its 10-yr mean of c. USD327-395/ton in FY24F (-16.5% YoY) on subdued energy prices.
▪️ The expected slowdown in output from El Nino, a dragged-out replanting intensity and aging trees, in tandem with solid demand from resilient Indian consumption and rising biodiesel blends bodes higher CPO approaching 2H24. At the same time, El Nino is likely to boost soybean productivity, dragging edible oil prices.
▪️ Hence, we hold a NEUTRAL outlook whilst favoring DSNG; their strong output growth through its relatively young prime tree age and their frontrunning ESG initiatives – notably their Bio-CNG system integration – to cut costs and boost ESG scores is underrepresented in its current trading value (c. IDR550/share) as we believe it to be fairly valued at IDR690/share.
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