Merrill L. CPO Asean - Time to get excited

Tanggal: Senin, 26 Juli, 2010, 3:02 AM
Oil Palm Plantation - ASEAN: Time to get excited
Primary Analyst: Jeffrey Ng


All stars aligned for CPO price to rebound
We believe spot crude palm oil (CPO) price is likely to hit RM2,800/mt (US$875/mt) by end-2010. CPO supply disappointment, coupled with strong domestic soybean demand in South America, in our view, will be the key catalysts for CPO price to rally in 4Q10. We therefore hike our CPO price forecasts by 9% in 2011 to RM2,500/mt and 20% in 2012 to RM2,400/mt. As a result, our FY11-12E profit estimates are up 7-35%. POs are also lifted by 11-27% based on up-cycle in P/E.

Buy AALI, LSIP, IFAR, IOI and GGR; KLK Neutral
While we are bullish on CPO price prospects we do not believe it will benefit all stocks. As such, Astra Agro (AALI), London Sumatra (LSIP) and IOI are upgraded to Buy. KL Kepong (KLK) is lifted to Neutral as it has outperformed peers by 3%. Their outperformance was largely supported by the Malaysian Employee Provident Fund. We prefer AALI and IOI for the near-term exposure as all trees are now producing. However, GGR is the most liquid proxy. For longer-term investment, we prefer IFAR and LSIP.

Catalyst 1: CPO supply disappointment
The poor fertilizer application by small-scale farmers in 2008 is back to haunt productivity. Malaysia (world's second largest CPO producer - 38%) experienced two negative growth periods (2007 and 2009) in the past 10 years. Fresh fruit bunch (FFB) yield for first half of both years trended below January, and 2010 has shown a similar pattern. Our channel check with Indonesia planters indicated the same finding, further supported by AALI's 1H10 FFB output, which fell 8.3% YoY.

Catalyst 2: Soy-led recovery
Despite the abundant soybean harvest in South America (SA) in 1H10, the supply is not flowing entirely into the export market. SA utilization of soya oil for biodiesel production has been strong in 2010 and hence reduced its soybean exports and soya oil supply. Brazil and Argentina (world's second and third largest producer) consumed 6% of global soya oil in bio-diesel production in 2009 and this is likely to rise to 8% in 2010. Argentina's mandatory admixture of biodiesel to fossil fuel will be raised to 7% from August 2010, compared to the current 5%.

Potential La Nina and agri-inflation risk reemerging
The potential development of La Nina (extreme wet weather in Asia) is likely to affect harvesting activities and also output. However, uncertainty about the weather outlook substantially increases investment risk. On a longer term view, we believe another round of agri-inflation is brewing. The rising pressure from environmentalists might slow future CPO output growth while 50% of the world's annual incremental demand is filled by CPO. Demand usually grows by 4mtpa.