Sector valuation is overpessimistic.
Even with lower crude oil prices and the EU debt crisis, we believe plantation stock prices have been unjustifiably sold off despite precarious vegetable oil supply outlook. By end Sep12F quarter, the combined ending stock of palm, soybean and rapeseed oils (as a share of consumption) would have been at its lowest since Sep05. There is no remedy for lack of supply.
Looming end to soybean export boom.
We recently examined soybean export data issued by Oil World and found that global inventories are fast depleting, due to South American crop failure earlier this year. Any US crop setback in Sep-Nov12 – if El Nino developed – would exacerbate this situation; as South American stocks would already have been depleted by then. Aug12 global stock levels are now forecast to be the lowest since Aug05. Subsequent stock levels are due to decline further – even after US output reaches the market – as Chinese imports are expected to jump 11% y-oy. We believe the market is ignoring this.
Priced below market.
Despite expectations of a further tightening in soybean supply, current palm olein (cooking oil) price discount to soybean oil is the widest since Oct11. Most planters PE now trade at -1SD and are pricing-in long term CPO price at 7-20% below current depressed levels. We think this is unsustainable; as CPO prices may not fall to such level on global vegetable oil supply constraints. In China, brisk soybean imports have so far defied poor crush margins. The coming supply crunch could spell even poorer margins, unless both soybean oil and soybean meal prices rise further.
Don’t miss the boat.
Planters with significant volume growth such as Sampoerna A., First R., TSH and Bumitama stand to benefit the most from both pricing and volume
recoveries. Recall that poorer-than-expected 1Q12 FFB harvests, higher fertilizer costs – hence earnings – triggered the earlier sell-off. We also like Sime and Genting P. on sound balance sheets, decent growths.