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ASEAN Oil Palm Plantations
Crude Oil Downgrades; Impact on Indo-Malay Planters
Global crude update — Citi’s Global oil team has cut 2009E oil price assumption from US$122.5/bbl to US$90/bbl; 2010E to US$90/bbl from US$100/bbl. Longterm oil price forecast is still US$100/bbl. CPO and crude have a loose arbitrage relationship. In essence, wholesale diesel prices are a direct pass-through from crude prices (US$X/barrel of crude ≈ US$10.1X/ton of diesel).
from US$122.5/bbl to US$90/bbl; 2010E to US$90/bbl from US$100/bbl. Longterm
oil price forecast is still US$100/bbl. CPO and crude have a loose arbitrage
relationship. In essence, wholesale diesel prices are a direct pass-through from
crude prices (US$X/barrel of crude ≈ US$10.1X/ton of diesel).
Downgrading 3-year forecast CPO price assumptions — In response to the downgrade in crude oil price assumption, we are downgrading our CY08-10E CPO price assumptions. Our revised CPO price assumptions are US$941/t, US$810/t for FY09E and FY10E. The reduction in CPO price assumptions would result in FY09E-FY11E earnings cuts of 6%-28% for Malaysian plantation stocks and 11%- 38% for the Indo planters.
downgrade in crude oil price assumption, we are downgrading our CY08-10E CPO
price assumptions. Our revised CPO price assumptions are US$941/t, US$810/t
for FY09E and FY10E. The reduction in CPO price assumptions would result in
FY09E-FY11E earnings cuts of 6%-28% for Malaysian plantation stocks and 11%-
38% for the Indo planters.
Impact on target prices — For the Malaysian planters (DCF-based target price for plantation business), we have lowered target prices by 13%-21% to factor in the reduction in CPO price assumptions for the immediate 3-year forecasts and higher average beta of 1.3x (for plantation stocks) versus 1.1x previously. For the Indonesian companies, target prices (P/E based) have been cut by 18%-38% following the downward revision in earnings.
plantation business), we have lowered target prices by 13%-21% to factor in the
reduction in CPO price assumptions for the immediate 3-year forecasts and higher
average beta of 1.3x (for plantation stocks) versus 1.1x previously. For the
Indonesian companies, target prices (P/E based) have been cut by 18%-38%
following the downward revision in earnings.
Downtrend in biological yield cycle? — In the Aug MPOB statistics, we have seen production momentum slowing to 2.5% versus double-digit growth in the first 7 months of the year. If we continue to see such trend in September, this could be an indication of a downtrend in the biological yield cycle. Hence this would be a positive catalyst for the sector as it could bring down inventory levels further.
production momentum slowing to 2.5% versus double-digit growth in the first 7
months of the year. If we continue to see such trend in September, this could be
an indication of a downtrend in the biological yield cycle. Hence this would be a
positive catalyst for the sector as it could bring down inventory levels further.
Maintaining Buy ratings on all plantation companies — We remain fundamentally positive on the outlook for CPO-plays. In the Malaysian plantation space, our top pick is IOI Corporation and among the Indo planters, our top picks are First Resources and London Sumatra.
positive on the outlook for CPO-plays. In the Malaysian plantation space, our top
pick is IOI Corporation and among the Indo planters, our top picks are First
Resources and London Sumatra.
P/E multiples below historical averages — With the sharp decline in oil price and CPO prices over the last 2½ months, P/E multiples are all now below historical averages and trading at/close to trough valuation for some of the plantation stocks.
CPO prices over the last 2½ months, P/E multiples are all now below historical
averages and trading at/close to trough valuation for some of the plantation stocks.
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