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Stock Index
Bahana Securities

23 Oct 2019 | 17:14 WIB
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Bahana Securities

23 Oct 2019 | 17:14 WIB
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Indonesian plantations update: Gradual price recovery

Predictive Ocean Atmosphere Model for Australia (POAMA) projects a high El Nino probability (exhibit 1) with SST anomaly level above 1, threatening South East Asia, which would negatively impact CPO production in Indonesia and Malaysia.

Given that El Nino was last seen in 2009, its occurrence this year is likely, as interval between El Nino events is around 5-6 years (exhibit 2). However, we expect the real impact of El Nino on companies’ FFB production to only be felt in 1Q16, translating to higher CPO prices ahead based on historical records.  In addition, the price gap between soybean and palm oil has been rising, making CPO more attractive to buyers.


Separately, the Indonesian government has signed the Biodiesel B15 program with implementation of CPO levy likely to be pushed from the end of May to August, according to GAPKI, the Indonesian Palm Oil Association. Due to this delay, we only expect slight increase in domestic biodiesel demand in 2015.


Further away, December flooding in Malaysia is likely to result in weak CPO production this year. In Indonesia, we have also noted a slowdown in 1Q15 production of palm oil companies on lower yields with GAPKI maintaining its 2015 target of 31.5mn tons, flat y-y, on fear of an El Nino that could adversely impact  Indonesian domestic production.


After factoring in the issues discussed above and the current  low brent oil price, we revise up our 2015 Rotterdam price estimate slightly from USD660/ton to USD690/ton, down 16% y-y (2014 average: USD825/ton), with limited upside of only 3% compared to 5M15 average Rotterdam price of USD670.


However, we expect the net impact of this on domestic CPO players to be significant in the short term, particularly as the government has delayed the implementation of  palm oil levy to August from earlier plan in May while export tax for Rotterdam remains at zero as long as CPO prices is below USD750/ton.


We also raise our local currency forecast to IDR13,000/USD for 2015 and to IDR13,150/USD for 2016 due to stronger USD outlook.  Nevertheless, we have made little changes to our 2015 CPO price assumption given the levy implementation of USD50 for CPO and USD30 for palm oil products.  However, due to flat production estimates, we have reduced 2015F-16F earnings by around 5%-17% for companies in our coverage.


On the back of low production resulting in gradual CPO price recovery, we have raised our rating on plantations to NEUTRAL from Underweight. Despite a more positive CPO price outlook, strong market outperformances for most of our stocks in the past month translate to expensive valuations.  However, we upgrade Tunas Baru Lampung (TBLA) from Hold to BUY on higher cooking oil sales volumes and cheap valuation.

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