Our regional CPO analyst Wilianto has just raised his CPO price assumption from US$500/ton to US$700/ton. Edible oil supply remains tight while demand remains firm. His upgrade in our CPO price assumption has pushed up our earnings forecast by 30-138% in 2010. This reflects operating leverage as plantation production costs are relatively fixed. Maintain OWT for the sector.
His large cap pick are Malaysian KL Kepong (KLK MK), Sime Darby (SIME MK, upgraded from OPF to BUY). But if you don’t mind smaller caps that are trading at deep discount to the large cap: Bakrie Plantation (UNSP IJ), and Sampoerna Agro (SGRO IJ).
London Sumatra (LSIP IJ) is trading at 50% discount to Astra Agro (AALI IJ) in term of EV/ha. We believe that this discount is excessive. LSIP’s problems are fixable. The estate suffered from less than ideal maintenance during the Asian crisis. But the problems are being addressed. LSIP will have new CPO mill in East Kalimantan (this area will account for no less than 30% of LSIP’s planted area in few year time) that will improve their margins. LSIP also controls an awesome seed garden and the quality of their trees is amongst the best.
Key points from the report:
We have upgraded our CPO price assumption from US$500/ton to US$700/ton.
This lead to 30%-138% earnings upgrade in 2010 as plantations are leveraged to CPO price movement. We are now 30% above consensus.
Supply of edible oils remain tight
All eyes on US soybean planting. Planting progress only 14% vs. 25% average. Late planting will increase risk of lower yield.
Inventory of soybean and palm oil are at multi years low.
Demand remains firm as India and China continue to up consumption. China is now the largest consumer of CPO and India increasingly relies on CPO as well.
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