PLANTATION SECTOR UPDATE
Bienvenida La Nina!
The Impact of Wet Season to CPO Price
Weather and seasons have been known to affect crops and palm tree is no exception. One of the common enemy to planters is heavy rain and extended dry season. For the upcoming season, La Nina, a weather pattern of hard wind and rain, has a 75% chance to occur starting in October as usually the conditions persist for around five months. While rain increases CPO production, heavy rain affects otherwise. The weather will cause a delay in the fresh fruit bunches evacuation and reduction on CPO production due to flood on the mature fields. Based on the historical La Nina occurrence, the weather has affected CPO price as shown on Exhibit 02. During the season, CPO price has went up on average by 9.90% due to inequality in supply and demand. Although the last period of La Nina in Oct-2017 to Aug-2018 has caused price to decrease by –20.14% due to an increase on Indonesia and Malaysia’s inventory by 40.79%. So, due to the imbalance, we estimate that the CPO price will rise to RM2,700/ ton in FY20E and RM2,900/ton in FY21F.
Further Frictions to Drive the Price North
Other than the weather, labor shortage in Malaysia also contributes to a drop on CPO production which expert estimates production to drop by -2.52% YoY to around 19.3 million ton in FY20E. Subsequently, Sabah has prohibit planting, refinery and downstream activity on CPO plantation due to a rise on Covid-19 cases, which will further cause disruption on supply chain as Sabah contributes 25% to Malaysia's total CPO production. Furthermore, the US has block import from one of the largest CPO producer in Malaysia due to a violation of human rights. We believe the bold move was taken because they're assured that the soybean oil produced will be enough to replace CPO. The US Department of Agriculture (USDA) reported that the soybean harvested has reached 20% as of 28 September, whereas the amount keeps on increasing from the five-year average of 15%. Likewise, soybean oil price has been showing a uptrend lately by 7.22% YoY bringing up CPO price as well in the process by 26.57% YoY. The increase on soybean price is supported by lack of supply due to adverse weather and higher demand for biodiesel conversion in the US. In regard of the Mid Autumn Festival, which is called the golden week (October 1st to 8th is set as national holidays), China will be closing all economic activities resulting in no CPO demand for a week. This will surely affect the CPO price in the short term.
A Promising B30 Outlook in FY21F
Based on GAPKI data as of July 2020, CPO and the derivatives export has reached 3.12 million tons (USD1.86 trillion), contributes 13.6% of the total export. Import remains high from China (+43% MoM) and Middle East (+65% MoM) while India and Africa's demand slipped by -5%/-15% MoM respectively. Whereas, CPO export from Indonesia accounted for 89.37% of India’s CPO Import and 72.66% of China CPO Import. Furthermore, domestic absorption as of July 2020 has reached 10.09 million ton which rose by 3% YoY while July's consumption consist of biodiesel (87,000 tons), oleo chemical (6,000 tons) and food products (4,000 tons). One of the challenges faced by the Government is the market index price deviation between fossil fuel and bio fuel causing a swell on the state budget. B40 is still under considerations to be implemented because levy alone cannot finance the program in FY21F, therefore a green incentive scheme from the Government is needed. A price sensitivity done by IRAI produce a better result for B30 to be continued in the FY21F rather than B40 due to a higher net CPO price.
Overweight Outlook with Preferred Stock AALI (BUY; TP: IDR11,800) and LSIP (BUY; TP: IDR1,100)
We recommend an OVERWEIGHT outlook for plantation sector in regard of the following issues: 1) La Nina season disrupting production and supply chain; 2) Recovering demand; 3) Domestic biodiesel absorption, which we believe will gave rise on CPO price as the 2H became the bullish season. Our stock pick on this sector remains on AALI (BUY; TP: IDR11,800) and LSIP (BUY; TP: IDR1,100) as we believe these companies will be benefited from the latest issue. Based on historical data, La Nina has impacted AALI to increase by 19.87% on average and LSIP by 29.14% on average. Currently, AALI and LSIP is traded at –0.87STD/-1.46STD (5-year average) with PBV level of 1.07x/0.75x.
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