DBS Highlights Plantation

Raising expectations
• CY10F-12F CPO prices raised by 1-3% on narrower discount to soybean oil, as we cut CPO inventories
• Potentially stronger RMB risks measures to protect China ’s domestic interests. Wilmar may benefit
• Sugar and rubber prices raised; fertilizer price cut – more boost to profits • 1QCY10 earnings to seasonally weaken, as 11-13% stronger prices is offset by c.6-50% volume drops
• We prefer China processors and volume plays: Wilmar,First R, IndoAgri (upgraded to Buy), and Sampoerna A.

CPO prices raised on lower discount to soybean oil. We lifted CY10-12F CPO price forecasts by 1.2-3.4% (see table below right), as we cut palm oil supply and inventory forecasts given drops in Malaysian yields in Jan–Feb10.
Potentially stronger RMB may benefit Wilmar. Stronger RMB should make palm and soybean oils cheaper in China . But as imported soybeans are already cheaper; a RMB revaluation may prompt measures to protect domestic interests to keep domestic prices from dropping too much. Wilmar’s oilseeds processing margins could see an expansion on lower feedstock costs and steady ASP. We also upgrade Wilmar on more aggressive rice & flour milling expansions.

Sugar and rubber prices upgraded, potash prices cut. We were too bearish. Indonesian sugar prices are still hovering c.US$1,200-1,400/MT and rubber prices have shot up to c.US$3,300/MT – compared to previous expectations of c.US$540 and c.US$1,960, respectively. CY10F-12F rubber prices are now adjusted by 39-44%; while CY10F-12F Indonesian sugar prices are raised to Rp9.8k-10.2k/kg from Rp5.2k-5.5k/kg. We also cut potash price assumptions by half to US$500/MT this year, given drop since last year. Biggest beneficiary: IndoAgri (FY11F revenue contribution: 5.3% rubber, 11.6% sugar).

Seasonally lower 1QCY10 earnings. Malaysian planters 1QCY10 earnings should drop q-o-q, as 12% higher prices would not be enough to offset 23-25% volume drops. Indonesian planters should book even lower earnings q-o-q, on expectations of 28-50% volume drops and faster IDR appreciation. Kencana’s 6% q-o-q FFB volume drop is an exception.

We prefer China processors and strong volume plays. We prefer processors such as Wilmar. For upstream planters, recommend strong volume plays: First R., IndoAgri (upgraded to Buy) and Sampoerna A.