El-Nino Effect on Oil Palm

KUALA LUMPUR: Maybank Research maintains its 'neutral' call on the plantations sector on lack of short-term catalysts.

"Overall, second quarter of 2014 core net profits of all plantation groups should be stronger, but will still be mostly within our expectations. Bumitama (Bal), TSH Resources (TSH) and Ta Ann Holdings (TA Ann) have the potential to surprise on the upside, while TH Plantations (THP) and Felda Global Ventures (FGV) could surprise on the downside. For Ta Ann, the upside will come from stronger-than-expected timber earnings.

"We reiterate our view that crude palm oil (CPO) price will remain weaken till Aug 2014, ranging between RM2,400-2,600 per tonne before trending higher in fourth quarter 2014. We however believe there is limited downside risk to CPO price at the current level of RM2,300 per tonne as long as crude oil price stays at US$100-110 per barrel.

"We maintain our 'neutral' view on the sector for the short term. Key upside risk to our view is the development of a strong El Niño and war. Our fundamental 'buys' in the region are BAL, First Resources (FR), Wilmar, Astra Agro Lestari (AALI), Ta Ann, Sarawak Oil Palms (SOP) and Sime Darby. "Sells' are on IOI Corp and THP," says Maybank in its research notes.

Maybank said that all plantation groups under its coverage (except FGV), reported stronger fresh fruit bunch (FFB) output for second quarter 2014.

"Also, almost all reported higher FFB output with the exception of Genting Plantations (GENP). BAL( +49 per cent), TSH (+33 per cent), AALI(+22 per cent) and GENP (+21 per cent) posted strongest FFB growth in second quarter. Meanwhile, slower growth was experienced by FGV (-2 per cent), THP (+5 per cent), and FR (+6 per cent).

"Besides robust production, second quarter 2014 results will also be augmented by higher CPO spot average selling price (ASP) for the Malaysian planters at RM2,576 per tonne (MPOB) in 2Q14 (+11 per cent), and Indonesian planters at Rp9,513 per kg (+23 per cent)."

Maybank noted that ahead of Indonesia’s Presidential Election on July 9, the IDR had weakened against the US dollar in second quarter to 11,855, after it strengthened in first quarter.

"Planters with Indonesian operations and US dollar-denominated debt (namely TSH, GENP, BAL and AALI) will likely recognise chunky unrealised forex translation losses (as their reporting currencies are in RM or IDR), reversing most of the unrealised forex translation gain recognised in first quarter 2014. This is however non cash flow, merely accounting in nature."- NTSP