Bottom of the cycle
• Global palm oil stockpile is at one-year low on stronger-than-expected demand, despite global slowdown
• Near-term weakness in CPO prices may not drag planters much, given output, earnings recoveries
• CY13F/14F/15F CPO prices adjusted -4%/-10%/-11% in USD, 0%/+1%/-1% in MYR. Beware of upside risks from FY16F, as supply growth decelerates
• Multi-year CPO price gain from here. Top BUYs: AALI, BAL, IFAR (upgraded), FR, TSH (upgraded), IOI
Darkest before dawn. Global palm oil output was mostly lower-than-expected in 1HCY13, and we expect a strong seasonal pick up during the Sep-Nov13 harvests. Palm oil may have partly priced-in this prospect, as end-Aug13 global palm oil inventory is already at one-year low. By year-end, we expect global palm oil stockpile to fall to 21.4% of consumption from 22.6% as at end-Dec12, and declining towards 20.2% by end-Dec14.
Bottom of the cycle. In the short term, we expect palm oil prices to correct as inventory seasonally rebuilds on peak output. This may not drag share prices much, as earnings are due to sequentially recover. Any weakness should be taken as an opportunity to collect given rising biodiesel demand and normalised stockpiles next year. We expect current large discount to soybean oil prices to narrow.
Resilient despite slower global economic growth. We revised our CPO price forecasts (summarised in table below) to reflect changes in soybean oil supply expectations, slower global GDP growth and higher biodiesel demand. Bear note that it is getting difficult to expand; and new planting in Indonesia has dropped significantly. Labour, environmental, and borrowing costs are also rising. We expect supply growth to lag demand growth from FY16F.
Top picks. We upgraded IFAR to BUY on higher forecast output and ASP. We believe the counter is oversold. We raised TSH to BUY and maintained our BUY calls for AALI, IOI, FR and BAL. Take profit on LSIP, SGRO and KLK, given company-specific concerns and expensive valuations.
Risks to our calls. Any hike in Indian import tariffs on refined oils is negative on refiners’ spreads, and could set off another round of export tax adjustments. Indonesia’s current account deficit may put off restrictions on maximum concessions for now, but the issue is not off the table. We assume c.80% compliance with Indonesia’s new biodiesel mandate. Any deviations caused by crude oil price volatility would impact our TPs. We also see higher prices on any disruptions to global oilseeds supplies.
Publish date: 26/09/13