Sector Update, 13 January 2014

Plantation

Overweight
Macro

Stockpile Hits Seasonal Peak

Risks Growth Value

2 2 2
2

Average crude palm oil price, MYR/tonne

3,500

3,000

2,500

Malaysias palm oil stockpile rose marginally to 1.985m tonnes in Dec 2013 likely to be the seasonal peak. In the months ahead, inventory will ease, providing a lift for palm oil prices. A stronger price catalyst, however, is in the form of Pertaminas upcoming second biodiesel tender. Maintain OVERWEIGHT, with First Resources, Bumitama and AALI as sector Top Picks. Malaysian Top Picks are IOI and SOP.

2,000

1,500

CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 Average CPO price, MYR/t

1,000

No surprises. Malaysias palm oil inventory ended at 1.985m tonnes for 2013, sharply lower vis--vis end-2012, as export growth outstripped production growth and local consumption surged during the year. . Prices softened. Palm oil prices have retraced in the past two weeks, as Indonesias mandatory biodiesel programme encountered hiccups, due to pricing issues. Pertamina only managed to secure 18% of the 3m tonnes of biodiesel supply required. The 18% secured is sufficient for two months consumption. There is an upcoming second tender, which is said to be on 21 Jan. Production weakness more apparent in 2Q. We believe palm oil prices will strengthen progressively throughout 2014 due to lacklustre production in Indonesia, as a result of rainfall deficit over the past two years. We believe more price strength will be seen in the 2Q, as production weakness becomes more apparent. Weak 1Q production is likely to be perceived as seasonal in nature. Indias import tax. India raised its import duty for refined edible oil from 7.5% to 10.0% but tax for crude edible oil is unchanged, the impact of which is neutral it will only cause a switch from refined to crude products. Buying opportunity. We view the price pullback as temporary and provides a buying opportunity. The main stumbling block for palm oil prices to charge higher at this point in time is the relatively narrow discount to soybean oil at USD65 per tonne. On the flipside, this also means there is a USD65 upside for palm oil price before it comes to parity against soybean oil price. As we have seen in 2009 and 2010, poor palm oil production led to parity price against soyoil.
P/E (x) P/B (x) Dec-14F 3.0 2.3 1.4 2.4 1.8 2.1 0.6 1.8 3.8 0.9 3.1 0.9 1.6 1.2 1.9 1.0 1.4 2.2 1.1 2.5 1.6 1.7 2.8 3.0 2.4 1.0 2.1 2.5 3.7 3.1 Yield (%) Dec-14F 3.9 Rating BUY BUY BUY BUY BUY NEUTRAL BUY SELL BUY BUY NEUTRAL BUY NEUTRAL BUY BUY NEUTRAL SELL NEUTRAL Price IDR21,350 SGD0.95 MYR3.23 MYR4.50 SGD2.07 MYR10.74 SGD0.53 MYR3.42 MYR4.24 IDR370 MYR23.90 MYR3.38 IDR1,535 IDR1,880 MYR6.95 MYR0.96 MYR1.85 Target IDR28,352 SGD1.35 MYR3.88 MYR5.20 SGD2.70 MYR10.90 SGD0.66 MYR2.80 MYR4.83 IDR585 MYR24.40 MYR4.22 IDR2,179 IDR2,775 MYR7.12 MYR1.04 MYR1.26 MYR3.19 Dec-14F 13.6 11.4 9.9 22.7 12.0 22.7 14.3 19.3 16.0 8.8 19.0 14.4 11.3 9.5 15.6 15.3 23.6 16.2

Source: Malaysian Palm Oil Board (MPOB)

Average palm kernel price, MYR/tonne

2,500

2,000

1,500

1,000

500 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13

Average PK price, MYR/t

Source: MPOB

Average refined palm oil price, MYR/tonne

4,000

3,500

3,000

2,500

2,000

1,500 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13

Average RBDPO price, MYR/t

Com pany Nam e Astra Agro Lestari Bumitama Agri Ltd CB Industrial Product Holding Felda Global Ventures Holdings First Resources Genting Plantations Golden Agri IJM Plantation IOI Corporation JA Wattie TBK PT Kuala Lumpur Kepong Kulim Malaysia London Sumatra Indonesia Tbk PT Sampoerna Agro Saraw ak Oil Palms TDM TH Plantations

Source: Bloomberg

Alvin Tai, CFA +603 9207 7628

alvin.tai@rhbgroup.com

Hoe Lee Leng +603 9207 7605

hoe.lee.leng@rhbgroup.com

TSH Resources MYR2.88 Source: Company data, RHB estimates

See important disclosures at the end of this report

Source: Company data, RHB estimates

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Plantation
13 January 2014

How 2013 played out

Production trend
Malaysias 2013 palm oil production hit its highest level ever at 19.215m tonnes, an increase of 429,800 tonnes, or 2.3%, from 2012. West Malaysia produced 10.328m tonnes (+0.1% y-o-y), making up 53.8% of total production. Sabah production rose 4.2% to 5.776m tonnes, or 30.1% of the countrys production, while Sarawaks output rose by 6.4% to 3.110m tonnes, or 16.2% of national production. Within West Malaysia, the three biggest producing states, ie Johor, Pahang and Perak, make up 76% of Peninsula Malaysias production. Surprisingly, only three states, ie Johor, Pahang and Kelantan, showed production increases, while the other seven experienced production declines of between 1.7-12.9%.

Production yield

Malaysias oil yield was marginally better at 3.85 tonnes per ha compared to 3.84 tonnes in 2012. Sabah remained as the highest yielding state at 4.40 tonnes (4.29 tonnes in 2012).

Export trend

2013 total palm oil export rose by 3.2% to 18.122m tonnes, also a record high but only marginally surpassing 2011s 17.982m tonnes level. China remained the largest export destination with total shipment of 3.700m tonnes, or 20.4% of total exports, followed by Europe (12.9% of total), India (12.8% of total), Pakistan (7.9% of total) and the US (5.6% of total). Encouragingly, shipments to China rose by 5.6%, Europe was up by 4.9% and Pakistan by 6.3%. However, shipment to India dipped by 11.9% on loss of market share to Indonesia and the US slipped by 1.7%.

Local consumption

Malaysias local consumption rose by 12.1% y-o-y to 2.291m tonnes, driven by biodiesel consumption. However, local consumption is still significantly off peak of the 2.591m tonnes achieved in 2008.

Inventory

End-2013s 1.985m palm oil inventory was sharply lower than what it was at end2012, thanks to trade normalisation following the change in Malaysias export duty structure for CPO and poor production growth in Indonesia. Compared to the trough level of 1.648m tonnes in June 2013, it was up by 20.5%. We view inventory level as being comfortable and should not cause oversupply concerns.

Downstream performance

The abovementioned trade normalisation has helped the Malaysian downstream business remain competitive against its Indonesian counterparts. Malaysias refinery utilisation rate improved to 69.7% in 2013 compared to 63.0% in 2012. Oleochemical plant utilisation also improved to 77.4% compared to 75.9% a year earlier.

Average price

Palm oil prices averaged MYR2,375 per tonne, based on the simple average of West Malaysia MPOB price, or about 1% lower than our MYR2,400 per tonne expectation. On a weighted average basis, based on 43.7% production in the 1H and 56.3% in the 2H, average palm oil price was slightly higher at MYR2,380.

Price spread

Discount to soybean oil widened last year to an average of USD209 per tonne in 2013 compared to the USD208 discount in 2012. However, in the 4Q alone, average discount was at USD100 per tonne, with the discount reducing to under USD100 in Nov 2013 onwards due to the relative ampleness of soybean supply relative to palm oil. Compared to Brent Crude, palm oil traded at an average of USD4.08 discount per barrel in 2013, compared to an average premium of USD18.89 per barrel in 2012. The discount to Brent Crude encouraged the use of biodiesel, which helped pare down palm oil inventory in 2013.

See important disclosures at the end of this report

Plantation
13 January 2014 Figure 1: Palm oil's discount to soybean oil is at a narrow USD65 per tonne
1,600 500 450 400 350 300 250 200 150 100 50 -50

1,400 1,200
1,000 800 600 400 200 -

Premium, USD (RHS)

Source: Bloomberg

Soyoil, USD (LHS)

CPO, USD (LHS)

Figure 2: Palm oil is at discount to Brent Crude after the recent decline
90
70 50 30 10 -10 -30 CPO's premium over crude oil
Source: Bloomberg, RHB estimates

Soyoil's premium over crude oil

Figure 3: Palm oil against energy benchmarks (USD per barrel)

195 175 155 135 115 95 75 Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Gasoil
Source: Bloomberg

CPO

Brent crude

Biodiesel, SEA

See important disclosures at the end of this report

Plantation
13 January 2014 Figure 4: Palm oil prices vs inventory levels
4,500 4,000 3,000,000

2,500,000
3,500 3,000 2,500 1,500,000 2,000 1,500 1,000 500,000 500 0 0 1,000,000 2,000,000

Jun-02

Jun-04

Jun-06

Jun-07

Jun-09

Jun-11

Dec-02

Dec-03

Dec-04

Dec-05

Dec-07

Dec-09

Dec-10

Dec-12

Dec-01

Dec-06

Dec-08

Dec-11

Jun-13

Jun-03

Jun-05

Jun-08

Jun-10

Jun-12

Stocks, tonnes (RHS)

Source: MPOB

CPO Price, MYR (LHS)

Figure 5: India's import of palm oil largely in CPO form

8000 7000 6000

5000 4000
3000 2000 1000 0 YTD CY07 YTD CY08 YTD CY09 YTD CY10 YTD CY11 YTD CY12 YTD CY13

CPO
Source: India's Customs

Ref ined PO

Total

Figure 6: Composite fertiliser cost at USD343 per ha

900 800 700 600

500
400 300 200

100
0

Nov-06

Nov-11

Dec-03

Dec-08

Dec-13

May-04

May-09

SOA
Source: RHB estimates, Indexmundi

MOP

RP

Composite cost (FOB)

See important disclosures at the end of this report

Dec-13

Aug-05

Aug-10

Sep-07

Sep-12

Oct-04

Apr-07

Oct-09

Mar-05

Feb-08

Mar-10

Apr-12

Feb-13

Jul-03

Jul-08

Jan-06

Jan-11

Jun-06

Jun-11

Jul-13

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