R e g i o n a l

M o r n i n g

N o t e s

Tuesday, 16 December 2014

SECTOR UPDATE

MARKET WEIGHT

Plantation – Regional

(Maintained)

At A Crossroads Crude palm oil prices are at a crossroads with support from tighter supplies due to bad weather, but a sharp drop in crude oil prices is pulling in the opposite direction. We believe the CPO market has yet to find its equilibrium, waiting for a clearer direction based on how tight supplies would be or how much non-discretionary biodiesel demand could disappear. The recent strength of the El Nino indicator could be an important price-supportive factor. Maintain MARKET WEIGHT. WHAT’S NEW  At a crossroads. We believe the crude palm oil (CPO) market has yet to find its equilibrium and is waiting for a clearer indication of supplies disruption from bad weather and biodiesel demand risks after the sharp fall in crude oil prices. We believe the current CPO price trading range is supported by the potential tightening of global edible oilseeds and edible oil supplies in 2015. The next CPO price movement to the north or south will depend on these two wild cards: a) Negative: Biodiesel demand after fall in crude oil prices – about 70% of blending is non-discretionary. The increased usage of palm oil as biodiesel (from 6.9% of consumption in 2009 to an estimate of 16.2% for 2014) raises the concern that biodiesel demand will dry up given the sharp fall in crude oil prices. We estimated non-discretionary palm biodiesel demand using 2009-12 data when the CPO price traded at a premium to crude oil. We then took 2012’s (last year before CPO traded at a discount to crude oil prices) usage as a base and incorporated the recent mandates in Indonesia and Malaysia. We estimated non-discretionary demand at 6.8m tonnes vs 9.6m tonnes for 2014 or 70% of 2014’s biodiesel usage. Thus, the fall in crude oil prices may not have a huge impact on palm oil prices. This might explain why CPO trades at the range of RM2,100-2,200/tonne, which is higher than the CPO-biodiesel breakeven price of RM1,430/tonne. A key risk to our estimation will be the suspension of the biodiesel mandate especially by Indonesia, which is the largest palm biodiesel user now. b) Positive: Re-emergence of El Nino – impact on production. Over the last two weeks, the National Oceanic and Atmospheric Administration (NOAA) and Australia’s Bureau of Meteorology (BoM) have said El Nino indicators have strengthened again. Both organisations have raised the probability of an El Nino warming event to 65% and 70% recently from 58% and 50% in November. In the past, CPO prices have reacted positively to an El Nino event, mainly due to a palm oil supply shortage. The market is not factoring this in yet as the previous warning in early-14 turned neutral, eventually leading to a sharp price adjustment.

SECTOR CALL Country

Recommendation

Regional MARKET WEIGHT MARKET WEIGHT Malaysia MARKET WEIGHT Singapore Indonesia MARKET WEIGHT Source: UOB Kay Hian

STOCKS SELECTION Company

Rec

Share Price (lcl crcy)

Target Price (lcl crcy)

1.83 1.02 5.28 1,910 406

2.80 1.40 6.75 1,680 300

FR SP BUY BAL SP BUY SOP MK BUY LSIP IJ SELL BWPT IJ SELL Source: Bloomberg, UOB Kay Hian

SECTOR PE Sector 1 Year Forward PE

(x) 22 20

2sd = 20x

18

1sd = 17x

(US$/tonne) 1,400

PE (RHS)

16

1,200 1,000

14

mean = 15x

12

- 1sd = 13x

10

- 2sd = 11x

8

800

CPO Price (RHS)

600 400

6 09

10

11

12

13

14

Source: Bloomberg, UOB Kay Hian

ANALYSTS Regional Research Team +65 6535 6868 [email protected]

PEER COMPARISON Company

Ticker

Rec

Sarawak Oil Palm Sime Darby IOI Corporation Kuala Lumpur Kepong Genting Plantations IJM Plantations Felda Global#

SOP MK SIME MK IOI MK KLK MK GENP MK IJMP MK FGV MK

BUY HOLD HOLD HOLD HOLD SELL NR

First Resources Bumitama Agri Ltd Wilmar International Golden Agri-Resources Kencana Agri Ltd

FR SP BAL SP WIL SP GGR SP KAGR SP

BUY BUY HOLD HOLD HOLD

Astra Agro Lestari Sampoerna Agro London Sumatra BW Plantation

AALI IJ SGRO IJ LSIP IJ BWPT IJ

HOLD HOLD SELL SELL

Price @ 15 Dec 14 (RM) 5.28 9.01 4.64 20.10 9.55 3.20 2.37 (S$) 1.83 1.02 3.21 0.46 0.210 (Rp) 22,925 2,100 1,910 406

Target Price (RM) 6.75 8.30 4.15 20.00 10.10 2.90 NA (S$) 2.80 1.40 3.55 0.50 0.230 (Rp) 25,300 2,200 1,680 300

Market Cap (US$m) 664 15,624 8,440 6,121 2,103 806 2,473

2013 (x) 17.0 17.4 23.5 21.7 27.6 24.4 8.8

------ PE -----2014F (x) 13.1 18.3 20.0 18.7 25.0 22.9 19.3

2015F (x) 11.8 16.4 17.7 17.6 20.6 20.1 14.5

ROE (%) 7.1 1.9 4.8 2.8 2.1 1.9 15.5

P/B (x) 1.8 11.8 34.3 13.0 6.7 6.4 1.4

2,210 1,360 15,649 4,453 184

10.2 20.7 12.0 22.0 52.0

13.4 14.0 14.4 16.0 10.6

12.2 14.0 11.8 16.6 13.1

2.2 3.1 1.0 3.6 1.1

22.8 16.3 9.0 0.5 n.a

2,865 312 1,025 1,007

12.5 12.3 13.1 5.6

14.1 12.7 13.6 4.9

13.6 10.5 12.5 3.6

19.0 4.5 11.9 9.4

3.4 1.3 1.9 0.9

Div (sen) 0.9 36.0 12.9 63.6 11.5 7.0 6.8 (cent) 4.1 1.4 8.4 0.6 0.3 (Rp) 2.6 2.1 3.5 2.8

Div Yield (%) 1.0 4.0 2.8 3.2 1.2 2.2 2.7 2.2 1.4 2.6 1.4 1.2 1.9 2.1 2.4 1.8

Source: UOB Kay Hian

Refer to last page for important disclosures.

12

R e g i o n a l

M o r n i n g

N o t e s

Tuesday, 16 December 2014

ACTION  Maintain MARKET WEIGHT as there is no strong catalyst to send CPO prices to the recent high of RM2,900/tonne due to ample edible oilseeds supply. Maintain BUY on First Resources (FR SP/Target: S$2.80), Bumitama Agri (BAL SP/Target: S$1.40) and Sarawak Oil Palm (SOP MK/Target: RM6.75). SECTOR CATALYSTS  Palm oil shortage due to dryness. There could be an impact from the dryness experienced in 1Q14 and late-3Q14.  Restocking in China. Palm oil inventories in China have fallen significantly (down 60% from its peak of 1.2m tonnes in Feb 14).  Acceleration of biodiesel blending in Indonesia and Malaysia. Indonesia is now the largest palm biodiesel consuming country and if Indonesia attempts to meet its B10 requirement for transportation, there could be less palm oil available for the global market. ASSUMPTION CHANGES  We maintain our CPO price expectations of RM2,400 for 2014, RM2,525 for 2015 and RM2,600 for 2016. RISKS  Backtracking of biodiesel mandates in Indonesia and Malaysia after the recent fall in crude oil prices.  Another year of bumper soybean crops from the US.

2012 As Demand Base Indonesia 2.0 Domestic 0.6 Exports 1.4 Colombia 0.5 Malaysia 0.3 Thailand 0.9 Singapore 0.6 EU-28 1.9 Palm Oil 6.8 Source: Oil World, UOB Kay Hian (m tonnes)

+/-

1.4 -1.0 0.4 -0.2

New Demand Base 2.4 2.0 0.4 0.5 0.7 0.9 0.4 1.9 6.8

vs 2014F 3.8 1.8 2.0 0.5 0.6 1.0 0.4 2.3 9.6

RISING FEEDSTOCK USED FOR BIODIESEL PRODUCTION (m tonne) 35 30

(% ) 16

Total Feedstock Used For Biodiesel (LHS)

15

% of Total Oils & Fats Consumption (RHS)

14 13

25

12

20

DESPITE PALM OIL TRADE AT A PREMIUM TO CRUDE OIL PRICE IN 2009-2012, PALM BIODIESEL USE INCREASES ON MANDATED BLEND

11 10

15

9 8

10

7

(US$/tonne)

(m tonne) 35

Palm Oil Feedstock LHS) CPO Price (RHS)

30

1600

T otal Feedstock (LHS) Gasoil Price (RHS)

1400

6

5 2007

2008

2009

2010

2011

2012

2013

2014

Source: Oil World

1200

25

1000

20

800 15

600

10

SHARP INCREASE IN PALM OIL FOR BIODIESEL PRODUCTION (m tonne) 12

400

5 0

ESTIMATION OF NON-DISCRETIONARY DEMAND FOR PALM BIODIESEL

14%

17%

19%

20%

2007

2008

2009

2010

28%

23%

32%

33%

200 0

2011

2012

2013

2014

Source: Oil World, Bloomberg

2009 3.2 0.4 0.2 0.2 0.6 0.1 1.3

2010 4.0 0.7 0.3 0.2 0.7 0.1 1.5

16

% of Total Palm Oil Consumption (RHS)

10

14 8

12

6

10 8

4

INDONESIA IS NOW THE LARGEST PALM BIOIDESEL CONSUMER (m tonnes) Palm Oil Indonesia Colombia Malaysia Thailand Singapore EU-28

(% ) 18

Total Palm Oil Used For Biodiesel (LHS)

6

2011 5.1 1.4 0.4 0.2 0.8 0.3 1.4

2012 6.8 2.0 0.5 0.3 0.9 0.6 1.9

2013 8.6 2.6 0.5 0.5 1.0 0.4 2.5

2014F 9.6 3.8 0.5 0.6 1.0 0.4 2.3

5-year CAGR (%) 24.9 56.9 26.0 21.3 11.9 53.1 11.6

2011 7.4 5.1 6.2 0.1 1.4 0.2 0.5 1.4 22.3

2012 6.8 6.8 6.3 0.2 1.5 0.2 0.7 1.8 24.2

2013 7.0 8.6 6.2 0.1 1.9 0.2 0.9 2.1 27.1

2014F 7.3 9.6 6.4 0.2 2.2 0.2 1.1 2.3 29.1

5-year CAGR (%) 10.7 24.9 1.8 -2.1 16.1 8.4 17.6 19.2 12.5

2

4

0

2 2007

2008

2009

2010

2011

2012

2013

2014

Source: Oil World

Source: Oil World

FEEDSTOCK FOR BIOIDESEL (m tonnes) Soya Oil Palm Oil Rapeseed Oil Sunflower Oil Tallow Coconut oil Other oils & fats Used cooking oil Total

2009 4.4 3.2 5.9 0.2 1.0 0.1 0.5 0.9 16.2

2010 5.3 4.0 6.3 0.2 1.0 0.1 0.4 1.0 18.4

Source: Oil World

Refer to last page for important disclosures.

23

R e g i o n a l

M o r n i n g

N o t e s

Tuesday, 16 December 2014

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UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that

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R e g i o n a l

M o r n i n g

N o t e s

Tuesday, 16 December 2014

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