- FR, BAL and IOI Corp are the most profitable upstream players in 2013 and by inference, the lower cost producers.
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IOI Corp, Sime, FR, KLK and BAL are least sensitive to CPO price changes.
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Maintain our 12M NEUTRAL view. CPO price likely to range bound till November before it punches higher in December.
What’s New, What’s Our View
Who are the most profitable? FR retained its top spot as the most profitable upstream plantation group in 2013 (measured by EBIT per mature hectare) with an EBIT/ha of ~MYR9,620. Bumitama moved up one rank from 2012 at the expense of IOI Corp which dropped to the third spot. Meanwhile, TSH made it to the top 5 list on improved FFB yields (Fig 2). By inference, the more profitable groups have the lower cost structure per tonne of CPO.Who have the best yields? TSH posted the best CPO yield for 2013 with CPO oil yield of 5.3t/ha, boosted by its high FFB yield of 25.3t/ha and OER of 21.0%. This was followed by IOI Corp (5.1t/ha) and KLK (4.8t/ha).
Who have the highest organic growth? Those with the youngest tree age profile should grow the fastest. In our universe of coverage, BAL has the youngest tree age profile (~6.0-years old in 2013), followed by Ta Ann (TAH, ~6.4-yrs), TSH (~7-yrs), Sarawak Oil Palms (SOP, ~9.8-yrs), and TH Plant (THP, ~9-yrs). BAL (21% 3-year 2013-16 CAGR in FFB production), Ta Ann (16%), and TSH (16%) are projected to have the highest growth, followed by SOP (12%), THP (12%), Genting Plant (GENP, 12%) and FR (12%) (see Fig 6).
Whose earnings are the most leverage to CPO price movement? Those that have purer upstream exposure and relatively high all-in cost of production (per tonne) are the most leveraged due to either their relatively lower oil yields or higher cost base. They include THP, FGV, BPlant, AALI and Ta Ann whereby for every MYR100/t change in CPO ASP (on a full-year basis), their earnings, we estimate, would change by 10%-13% respectively (see Fig 7).
Who are least sensitive to CPO price changes? (i) Integrated players with downstream operations, (ii) diversified players, and (iii) relatively low cost producers. These include IOI Corp, Sime, FR, KLK and BAL.
Why are we highlighting this? Our analysis provides an investment case for stocks with differing profiles at different levels of CPO price. We advocate accumulation on dips for stocks with good long term growth prospects like FR, BAL, TSH, SOP. Stay Neutral on the sector for now as we expect CPO price to trade sideways between MYR1,900-2,200/t till Nov (due to lack of positive catalysts) before it punches higher in Dec.
Source: Maybank Research - 8 Oct 2014
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