Recommendation: Neutral
We are cutting our average CPO price forecasts by 5-11% for 2014-16 to reflect larger-than-expected global edible oil supplies as well as weaker demand for biodiesel usage in Indonesia. The CPO price declines in 3Q14 were sharper than what we had previously expected, no thanks to stronger soybean supplies and weaker Chinese demand. These factors, coupled with the recent sharp drop in crude oil prices, are likely to put a lid on near-term CPO prices. We cut our EPS forecasts for regional planters by up to 41% to reflect our CPO price downgrade. This lowers our target prices by up to 23% across the board. But we have upgraded six stocks as their valuations have improved. Our sector rating remains Neutral, with First Resources as our key pick.
These factors, coupled with the recent sharp drop in crude oil prices, are likely to put a lid on near-term CPO prices. We cut our EPS forecasts for regional planters by up to 41% to reflect our CPO price downgrade. This lowers our target prices by up to 23% across the board. But we have upgraded six stocks as their valuations have improved. Our sector rating remains Neutral, with First Resources as our key pick.
CPO price downgrade
3Q14's CPO price correction was steeper than expected due to stronger edible oils supplies prospects, weaker demand from China and lower crude oil prices. Following a review of the latest fundamentals for edible oils and fats, we have lowered our average international CPO price forecast by 5-11% for 2014-16 to US$840-910 per tonne (RM2,390-2,650).
Better CPO prices in 2015...
We project CPO prices to remain range-bound in the near term at RM1,900-2,300 per tonne, as the market digests the record US soybean supplies, higher palm oil supplies and lower crude oil prices. For 2015, we expect CPO prices to trend higher due to slower edible oils output growth and restocking activities by customers. We are more bullish on 2016 price prospects, as we expect stronger biodiesel demand and potential biological tree stress.
...to offset higher cost
We expect planters to face tougher challenges of reining in a steeper rise in operating costs in 2015 compared to 2014. The cost increases will be driven by higher minimum wages and lower fuel subsidies.
Maintain Neutral call
The steep share price corrections of selected regional planters have improved the valuations of this sector. We upgrade the ratings on six stocks to Hold/Add to reflect their more attractive valuations as well as downgrade Ta Ann to a Hold. However, we remain Neutral on the sector due to the lack of near-term catalysts. We would turn more positive when CPO prices can sustainably trend above RM2,500 per tonne.
Source: CIMB Daybreak - 28 October 2014
http://www.itradecimb.com.my/
