JPM Indo: ASEAN Plantations - JPM Conference Highlights: Overall Summary

We hosted 7 companies and 2 industry speakers at JPM's Plantations conference last week (17-18 Jan) in Singapore. The companies were Sime Darby (OW), First Resources (OW), Golden Agri (UW), Global Palm Resources (NR), Kencana Agri (NR), Mewah Int'l (NR), and PT Gozco (NR). The industry speakers were M.R. Chandran – Advisor, Roundtable of Sustainable Palm Oil (RSPO), and Dr. BV Mehta – ED, The Solvent Extractors Association, India (the leading importer/trader of vegetable oils). 32 clients from 26 institutions attended the conference. Key highlights are as per below (details in separate attached alerts).

• CPO price outlook – positive mid-to-long term, cautious at these levels. The industry speakers highlighted the structural trends which are likely to keep CPO prices within a new and higher band i.e. rising food consumption mainly from China and India, limited land resources, bio-diesel demand, and labor shortage.

But, both speakers are cautious on CPO prices at spot levels (M$3,800/t) or higher, citing prospects for demand rationing/substitution given CPO’s current discount of just US$20/t to soy-oil (historical mean of US$150-160/t).

• Anticipated production pick-up in 2011, new expansion in Africa. At current CPO prices, companies are looking for opportunities to sell forward, a sign that prices may be peaking. Indonesian players have seen signs of production recovery since 3Q10 and expect this to continue in 2011. Malaysian producers are experiencing some set-backs or double digit drops in production in last 1-2 months due to wet weather and labor shortage, but we anticipate an upturn in the yield cycle overall mainly by 2H11 which will raise production and weaken CPO prices. Separately, Sime and Golden Agri are looking at gradually expanding plantation land-bank in Africa given increasing constraints to expand in Malaysia and Indonesia (see separate notes for details).

• Conclusion. We had turned more cautious on the sector recently (for details, see our ASEAN plantations report of 12th Jan-11 titled ‘Does it get much better than this?’). Our CPO price forecast is M$3,400/t in 2011E and M$3,200/t in 2012E. Our key picks now are Sime Darby (big cap laggard with positive riskreward at current levels), First Resources (value and growth), and London Sumatra (value and exposure to strong rubber prices). We are UW on Wilmar, Golden Agri and Genting Plant, and Neutral on KLK, IOI and Indofood Agri.