·Speakers at the 2010 Palm Oil Conference were generally bullish, with few exceptions
·Labour shortage in Malaysia could worsen, might cap FFB harvest despite peak season
·February data from MPOB suggests near-term price strength is intact
·We continue to expect weak prices in 2Q10, and recommend to take profit on near-term strength.
2010 prices at RM2,400-3,300/ton. Speakers at the 2010 Palm Oil Conference mostly indicated that palm oil prices were likely to remain flat in the near term. However with the exception of Dr. James Fry, the speakers expect prices to strengthen in 2HCY10 with upper limit of RM3,300. Reasons for the strong price expectation ranged from El-Nino impact on palm oil supply, increased biodiesel usage, lower soybean crushing due to difficulty in disposing soybean meal, and increased world dependency on palm oil.
But trouble is brewing closer to home. During the conference, we also engaged several Malaysian planters on the issue of Indonesian labour shortage, which seems more serious than initially thought. In addition to competition from Indonesian planters, both governments have tightened labour movements. We do not see a near-term solution to this problem, and if it drags on, could lead to losses from unharvested FFB during the peak-harvesting season.
Near-term price strength intact. MPOB data released yesterday pointed to a sharp 12.4% m-o-m drop in February production, which caused inventory to fall to 1.79m MT despite a 11.6% drop in exports. These numbers were significantly below expectations, and next month’s inventory level could drop further if production fails to pick up and exports rebounds
No change to recommendations. We are maintaining our view that palm oil prices would face downside pressure in 2QCY10, mainly on expectations of lower soybean oil prices. We have already lowered Indonesian FFB yield assumptions due to less fertilizer application in 1H09, but will be reviewing Malaysian yield assumptions to factor in the recent dry weather and labour shortage problems if conditions are unchanged this month.
Selasa, 16 Maret 2010
Citigroup Malaysia Plantations - MPOB Statistics: February Stock Down 10.9%
CPO production down 12.5% MoM — February 2010 production fell 12.5% MoM to 1.16m tonnes. The MoM decline is not surprising due to seasonal factors and a shorter working month in Feb.
Exports fell 11.6% MoM — Palm oil exports declined 11.6% MoM to 1.29m tonnes. The decrease came mainly from Pakistan (-43.3% to 127,176 tonnes), China (-20.3% to 315,355 tonnes) and the US (-29% to 59,437 tonnes). However, there was an increase in exports to the Netherlands (78.9% to 150,325 tonnes), Egypt (43.4% to 70,066 tonnes) and India (19.5% to 122,570 tonnes).
Exports up 5.4% YTD — On a YTD basis, the increase came from China (54.1% to 711,152 tonnes) and the Netherlands (49.6% to 234,376 tonnes). However, there was a drop in exports to India (-31.4% to 225,117 tonnes) and Pakistan (-14.3% to 351,453 tonnes).
Stock usage ratio at historical average levels — Closing stock in February fell by 10.9% MoM to 1.79m tonnes, the lowest level in 5 months but this is within expectations as we are in a seasonally lower production period. The stock usage ratio rose marginally to 1.38x in February 2010 from 1.37x in January 2010. The historical stock usage ratio is 1.38x (data since 1983).
No major surprises in Feb numbers — The decline in production and exports is within expectations. We expect production and exports to improve in March and for stock usage ratio to decline.
Exports fell 11.6% MoM — Palm oil exports declined 11.6% MoM to 1.29m tonnes. The decrease came mainly from Pakistan (-43.3% to 127,176 tonnes), China (-20.3% to 315,355 tonnes) and the US (-29% to 59,437 tonnes). However, there was an increase in exports to the Netherlands (78.9% to 150,325 tonnes), Egypt (43.4% to 70,066 tonnes) and India (19.5% to 122,570 tonnes).
Exports up 5.4% YTD — On a YTD basis, the increase came from China (54.1% to 711,152 tonnes) and the Netherlands (49.6% to 234,376 tonnes). However, there was a drop in exports to India (-31.4% to 225,117 tonnes) and Pakistan (-14.3% to 351,453 tonnes).
Stock usage ratio at historical average levels — Closing stock in February fell by 10.9% MoM to 1.79m tonnes, the lowest level in 5 months but this is within expectations as we are in a seasonally lower production period. The stock usage ratio rose marginally to 1.38x in February 2010 from 1.37x in January 2010. The historical stock usage ratio is 1.38x (data since 1983).
No major surprises in Feb numbers — The decline in production and exports is within expectations. We expect production and exports to improve in March and for stock usage ratio to decline.
CIMB London Sumatra Result note - A turnaround year
(LSIP IJ / LSIP.JK, OUTPERFORM - Maintained, Rp9,250 - Tgt. Rp11,200, Plantations)
Maintain Outperform on Lonsum. FY09 core profit was Rp691bn, -24% yoy on Rp3.2tr sales, down 17% yoy. Core profit made up about 100% of our estimate but was 5% ahead of consensus. Higher yoy sales were largely driven by non-palm products and better margins, with the impact offset by higher opex, interest burden and taxes. Higher capex (by some Rp200bn) and the repayment of debt in 4Q09 resulted in an end-2009 cash balance of Rp682bn vs. our estimate of Rp900bn. We are leaving our FY10-11 earnings estimates unchanged, pending further analysis as details become available. We also maintain our target price of Rp11,200, based on 15x CY11 P/E. 2009 was a turnaround year, as reflected in much improved margins and cash flows. We expect further operational improvements to provide share-price catalysts, as well as buoyant CPO prices. Near term, better-than-expected dividends could also be catalysts, with payout currently assumed at 30%.
Maintain Outperform on Lonsum. FY09 core profit was Rp691bn, -24% yoy on Rp3.2tr sales, down 17% yoy. Core profit made up about 100% of our estimate but was 5% ahead of consensus. Higher yoy sales were largely driven by non-palm products and better margins, with the impact offset by higher opex, interest burden and taxes. Higher capex (by some Rp200bn) and the repayment of debt in 4Q09 resulted in an end-2009 cash balance of Rp682bn vs. our estimate of Rp900bn. We are leaving our FY10-11 earnings estimates unchanged, pending further analysis as details become available. We also maintain our target price of Rp11,200, based on 15x CY11 P/E. 2009 was a turnaround year, as reflected in much improved margins and cash flows. We expect further operational improvements to provide share-price catalysts, as well as buoyant CPO prices. Near term, better-than-expected dividends could also be catalysts, with payout currently assumed at 30%.
Mandiri Sekuritas INKP Lost in translation
Indah Kiat, part of Asia Pulp & Paper, is the largest pulp and paper producer in Indonesia. Despite of its considerable size, the company defaulted on the payment of its debts in 2001 and faced a slew of litigations. The company claimed that the remaining litigation is by the US Exim Bank related to debt of around US$55mn. With around US$3.1bn of debt having been restructured, and negative R/E balance, we view dividend payment probability is remote. In addition, the company’s complex supply chain structure could prevent INKP from obtaining optimum profit from its products. Therefore, we initiate coverage on INKP with Sell recommendation with TP of Rp1,600/share, representing 27.3% downside from the current share price.
Industry outlook is bright. Despite flat demand from developed countries, low per-capita paper consumption in developing countries combined with higher-than-average PDB growth will support paper demand at least until the next decade. Latin American, Russian, and Indonesian producers have the advantage of the low costs due to abundant raw materials. World paper price is still in a rising trend after a slump in 2009.
However, still grey area at the company level. Company’s supply chain structure could prevent them from being a real integrated pulp & paper company. They source wood from an affiliated company Arara Abadi (AA) and sell the finished goods via a parent company’s distributor, exposing them to transfer pricing risks, indicated by their considerably lower and more volatile margins compared with their peers in Latin America and Russia. The company also books unproductive assets in t! he form o f US$300mn interest free-loan to AA, and US$37mn unused machinery that is difficult to sell due to incomplete construction. It could be better if, for example, the US$300mn interest free-loan is converted into ownership in AA.
Dividend payment probability is remote. As of 9M09, the company posted US$212mn R/E deficit. It has no plan for quasi reorganization. This condition, combined with heavy debt of around US$3.1bn, maturing during 2015-2024, could prevent dividend payment in the near future. Instead of paying dividend, it probably will retain its earnings to improve net debt-to-equity ratio that currently is at 1.4x and FY10F debt-to- EBITDA ratio that is at 6.3x.&nbs! p; The company also did not pay dividends during positive R/E period on 1997-2000.
Sell stance on INKP. We initiated coverage on INKP with a Sell stance based on a DCF based-TP of Rp1,600/share (10.9% WACC, 5.0% TG), implying a 9.9x PER10F. Currently, INKP is trading at PER10F-11F of 13.6-10.1x, which is expensive, considering complex supply chain structure and remote dividend potential. Key upside potential is improving supply chain structure and rising pulp & paper price.
Industry outlook is bright. Despite flat demand from developed countries, low per-capita paper consumption in developing countries combined with higher-than-average PDB growth will support paper demand at least until the next decade. Latin American, Russian, and Indonesian producers have the advantage of the low costs due to abundant raw materials. World paper price is still in a rising trend after a slump in 2009.
However, still grey area at the company level. Company’s supply chain structure could prevent them from being a real integrated pulp & paper company. They source wood from an affiliated company Arara Abadi (AA) and sell the finished goods via a parent company’s distributor, exposing them to transfer pricing risks, indicated by their considerably lower and more volatile margins compared with their peers in Latin America and Russia. The company also books unproductive assets in t! he form o f US$300mn interest free-loan to AA, and US$37mn unused machinery that is difficult to sell due to incomplete construction. It could be better if, for example, the US$300mn interest free-loan is converted into ownership in AA.
Dividend payment probability is remote. As of 9M09, the company posted US$212mn R/E deficit. It has no plan for quasi reorganization. This condition, combined with heavy debt of around US$3.1bn, maturing during 2015-2024, could prevent dividend payment in the near future. Instead of paying dividend, it probably will retain its earnings to improve net debt-to-equity ratio that currently is at 1.4x and FY10F debt-to- EBITDA ratio that is at 6.3x.&nbs! p; The company also did not pay dividends during positive R/E period on 1997-2000.
Sell stance on INKP. We initiated coverage on INKP with a Sell stance based on a DCF based-TP of Rp1,600/share (10.9% WACC, 5.0% TG), implying a 9.9x PER10F. Currently, INKP is trading at PER10F-11F of 13.6-10.1x, which is expensive, considering complex supply chain structure and remote dividend potential. Key upside potential is improving supply chain structure and rising pulp & paper price.
CLSA INDO: Malaysian palm oil inventory drawdown continues
This is bullish for CPO and plantation stocks.
Comment from our analyst Wilianto:
Our top picks: KL Kepong, Sime Darby, Golden Agri, London Sumatra.
Stock fall more than expected to 1.79m tons (-10.9% mom, +14% yoy), below market expectation of 1.9m tons inventory.
Key factor is the decline in production that declined 12.4% mom to 1.16m tons and is already 41.7% below the peak production in Oct09. The decline is steeper than normal and anecdotal evidences continue to shows that production will remain low in Mar10.
Demand in the mean time remains strong/stable. Although it dipped 11.6% mom post CNY, the trend remains encouraging and no sign of weakness (see chart below).
We reiterate our positive view on the sector.
Comment from our analyst Wilianto:
Our top picks: KL Kepong, Sime Darby, Golden Agri, London Sumatra.
Stock fall more than expected to 1.79m tons (-10.9% mom, +14% yoy), below market expectation of 1.9m tons inventory.
Key factor is the decline in production that declined 12.4% mom to 1.16m tons and is already 41.7% below the peak production in Oct09. The decline is steeper than normal and anecdotal evidences continue to shows that production will remain low in Mar10.
Demand in the mean time remains strong/stable. Although it dipped 11.6% mom post CNY, the trend remains encouraging and no sign of weakness (see chart below).
We reiterate our positive view on the sector.
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