We expect CPO price to remain firm, at least until the first half of this year due to the risk of El-Nino. According to the Meteorology, Climatology and Geophysics Agency (BMKG) and international institutions, weak-to- moderate El-Nino is predicted to take place until 1H10 and would ease afterward. Another support to CPO price also came from low ending inventory level in Malaysia, hitting 1.8mn tons as a! t Feb10, the lowest since Sep09. In turn, CPO price is likely to remain firm until 2Q09 but may come under pressure in the second half on the back of ample South American soybean harvest coupled with narrow discount to soy oil. Therefore, we still keep our CPO price assumption intact at US$770-800/ton for FY10F-11F.
Weak-to-moderate El-Nino still intact. According to BMKG, weak El-Nino is predicted to take place until Apr10, while could prolong to Jul10, based on international institutions estimates (see exhibit 1 for the detail). Additionally, Southern Oscillation Index (SOI) has shown sustained negative values, which is usually accompanied by sustained warming of the central and eastern tropical Pacific Ocean and a reduction in rainfall over eastern and northern Australia (El-Nino). The most recent moderate El-Nino was in 2006-2007, which also indicated by SOI negative value during that period (see exhibit 2). On the field side, Astra Agro Lestari (AALI)’s management also reported a 4.7% yoy decline in CPO production, suggesting weak El-Nino is taking place.
Feb10 ending stock is the lowest in the last 5 months. The Malaysian Palm Oil Board (MPOB) reported that Malaysia’s CPO production in Feb10 was 1.2mn tons, down by 12.5% mom, the lowest level in the last 3 years. CPO exports also fell by 12.0% to 1.3mn tons in Feb, which brought total ending inventory to 1.8mn tons (-10.9% mom), the lowest level since Se p09. Therefore, we believe that CPO price cou! ld see ne ar-term strength on a low crop season, also to take into account El-Nino risk.
AALI - highest upside potential. Should El-Nino phenomenon come to worse, we believe AALI as a pure CPO player would benefit the most in time of rising CPO price. AALI’s plantation area, which are mostly located in North Sumatra would be less affected by El-Nino risk. Combined with its highest efficiency, dividend yield, and ROE, AALI is suitable for investors who want exposure to this upside potential.
Key risks to the CPO price. However, there are several risks on CPO price, such as: 1) higher-than-expected soybean harvest, 2) lower crude oil prices, and 3) government policies on export tax and import duty.
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