Refuelling biodiesel demand
We anticipate a better year for palm oil producers in 2014 as they are likely to enjoy higher selling prices for their palm products, lower fertiliser costs and a slower rise in labour costs. Also we expect M&A activities in this sector to remain healthy.
However, the sector's valuation is not cheap – it is trading in line with its historical average P/E - and we continue to expect challenges in reining in costs and growing the business. We maintain our Neutral stance on the sector. Our picks are First Resources (upstream exposure), Wilmar (biodiesel exposure), Ta Ann (mid-cap palm oil player), Astra Agro and London Sumatra (exposure to weak rupiah).
Better CPO price prospects
We project the average international CPO price to rise by 9% in 2014 to US$930 per tonne, fuelled by lower palm oil stockpiles, higher biodiesel demand from Malaysia and Indonesia and stronger consumption of palm oil due to an improving global economy. Malaysia’s CPO prices are expected to rise at a higher rate of 14% and Indonesia’s at 27% in 2014, driven mainly by our expectations of a weaker RM and rupiah against the US$. We think it is likely that planters could enjoy lower fertiliser costs in 2014, following the collapse of the cartel for potash, a key fertiliser input for estates. Since then, the average potash price has fallen 23% yoy to US$307 per tonne in 3Q13.
Higher biodiesel blend
The higher biodiesel mandate in Indonesia is expected to be a key demand driver for palm oil in 2014. This has led Pertamina to call for tenders for 6.6m kl of biodiesel for 2014 and 2015. If successfully executed, it could boost the near-term CPO price as the incremental palm oil supply is not sufficient to cover the sudden spike in palm oil demand of 1m to 2m per annum to meet the higher biodiesel blend. Malaysia is also planning to raise its biodiesel usage to 500,000 tonnes by end-2014, from 149,630 tonnes currently.
We have raised our FY14-15 earnings forecasts for Indonesian planters by up to 39% to reflect higher domestic prices after imputing a weaker rupiah assumption. As a result, we upgrade our calls for Astra Agro and London Sumatra to Add from Hold and BW Plant from Reduce to Hold. We have downgraded IOI Corp as the stock looks pricey after the demerger of its property assets.