KUALA LUMPUR: CIMB Equities Research has cut its average crude palm oil (CPO) price forecast by 5% - 11% for 2014 to 2016 to reflect larger-than-expected global edible oil supplies as well as weaker demand for biodiesel usage in Indonesia.
It said on Tuesday the CPO price declines in 3Q14 were sharper than what we had previously expected, due to stronger edible oils supplies prospects, weaker demand from
China and lower crude oil prices.
CIMB Research said following a review of the latest fundamentals for edible oils and fats,
It had lowered its average international CPO price forecast by 5%-11% for 2014-2016 to US$840-US$910 per tonne (RM2,390-RM2,650).
“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,” it said.
CIMB Research said this lowered its target prices by up to 23% across the board. However, it had upgraded six stocks as their valuations have improved.
“Our sector rating remains Neutral, with First Resources as our key pick,” it said.
For 2015, it projected CPO prices to remain range-bound in the near term at RM1,900 to RM2,300 per tonne, as the market digests the record US soybean supplies, higher palm oil supplies and lower crude oil prices.
For 2015, it expected 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,” it said.
CIMB Research expects 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.
“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,” it said.
CIMB Research continues to like First Resources for its strong output growth prospects, young estates and integrated business model. We view its recent share price weakness, arising from its poor 1H earnings performance, as a good opportunity to nibble on the stock and hence, take advantage of its long-term growth prospects.
Its other top pick is Astra Agro in Indonesia for its strong corporate governance and attractive valuations. It projects strong growth to come from its Kalimantan estates, while its venture into downstream businesses will partially cushion the group's earnings against CPO price volatility.
“We also like SIMP in Indonesia due mainly to its cheap assets proposition. The stock is trading below its NBV and the market is pricing the group's estates at an EV/ha of US$7,000, which is below replacement costs and the market's pricing for estates in Indonesia – even though it is the second-largest planter by market cap in Indonesia. We also see potential improvement in yield prospects for its young estates in the coming years,” it said.
http://www.thestar.com.my
