Plantation Sector : Food prices to stagnate in the next decade? Neutral

SECTOR FOCUS OF THE DAY

Plantation Sector : Food prices to stagnate in the next decade?                Neutral

Bloomberg cited a joint report by OECD and FAO as saying that food prices will stagnate over the next decade as population growth declines and income expansion in emerging economies slows. The two organisations said that population growth will slow to 1% annually until year 2025.  This implies that the commodity bull run from 2006 to 2008 may not be repeated in the future. Vegetable oil prices would still see spikes in the short term due to supply disruptions but they may not be sustainable unless the weather is persistently unfavourable.  Since peaking at an average monthly price of RM3,811/tonne (MPOB local delivery) in February 2011, CPO prices have been oscillating in short cycles. After February 2011, CPO prices peaked at RM3,481/tonne in April 2012, RM2,855/tonne in March 2014 and RM2,647/tonne in April 2015. The rise in CPO prices in these cycles was driven mainly by dry weather. Also, CPO prices peaked mostly in the first half of the year before sliding in the second half on seasonally higher production.  

Maintain Neutral on the plantation sector. CPO prices are expected to be unexciting in the coming months dragged by rising output in Malaysia. Consensus has forecast Malaysia’s palm oil inventory at 1.72mil tonnes in June compared with 1.65mil tonnes in May. We also believe that soybean prices have priced in production shortfalls in the US and South America. Nevertheless, for investors who would like exposure to the sector, our top pick is Kuala Lumpur Kepong (KLK). We like KLK for its young oil palm trees in Indonesia and healthy balance sheet. Our fair value for KLK is RM24.40/share, which implies an FY17F PE of 25x

Others :

Oil & Gas Sector : 3 winding up petitions for THHE             Neutral

ECONOMIC HIGHLIGHTS

Philippines : Foresee limited upside on inflation

NEWS HIGHLIGHTS

CB Industrial Product Holding : New Modipalm mills to hit the market

Mah Sing Group : Ups the ante

GUH Holdings : PCB sales set to rise 6.5% this year

PIE Industrial : To leverage on rising demand for PCBA products