Plantation: The calm before the storm

Plantation: The calm before the storm (Underweight)

YTD, plantation companies have underperformed the JCI. However, we see further downside in share prices of plantation stocks in 2H13 because we expect CPO price would decrease further in 2H13, which would drag down their PE multiples. Hence we rate AALI, BWPT and LSIP as SELL, and SGRO as Neutral on cheap valuation.

Bleak outlook on CPO price. We foresee Rotterdam-based FY13F average CPO price of US$825 per ton (equivalent to RM2,271 per ton), a 17.3% yoy decline from FY12.  We expect strong CPO production growth in FY13F following large addition to newly maturing plantation area in FY12 and FY13F (from aggressive new planting in FY08 and FY09). 1H13 may see relatively high average CPO price of US$865 per ton due to seasonally low production, but we expect palm oil inventory to spike, generating unfavorable palm oil stock usage ratio, in 2H13 due to rising newly maturing plantation area and seasonally high FFB yield. This may well compel CPO mills to become distressed sellers because CPO production is likely to outpace sales. Thus we expect CPO price to slide to US$785 per ton in 2H13.

Not all volume production growth contributes additional net income. Due to a large part of their volume growth coming from newly maturing plantation area in 2013, AALI and BWPT’s expected rise in revenue would not in our view contribute additional net income. Newly maturing area often generates losses as their low productivity fails to compensate for their production costs.

SELL call on AALI, LSIP and BWPT, Neutral on SGRO. PE multiples of palm oil plantation companies decrease when CPO price decreases. Therefore, although plantation companies have underperformed the JCI, we still see further downside as we expect CPO price would further decrease in 2H13. As a result, we have sell calls for 7 months period on AALI, LSIP and BWPT. We have Neutral rating on SGRO as we think the downside of its share price is limited as its EV/ha of US$7,930 as cheap as new planting cost.