Plantation (Overweight) Sector Update: Food & Fuel Monthly

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Plantation (Overweight) Sector Update: Food & Fuel Monthly

We reiterate our bullish view on the plantation sector. The recent price pullback is a buying opportunity before the next leg of upswing, which should be even stronger due to deteriorating supply. We continue to like First Resources (BUY, FV: SGD2.86), Astra Agro Lestari (BUY, FV: IDR29,291), and IOI Corp (BUY, FV: MYR5.11). We also like growth stocks Jaya Tiasa (BUY, FV: MYR2.95), SOP (BUY, FV: MYR7.04) and Bumitama (BUY, FV: SGD1.39).

¨       Is El Nino imminent? In the past month, the Southern Oscillation Index (SOI) has fallen to negative 13, ie El Nino territory. We are now watching out for on-the-ground confirmation of an El Nino heat wave, which we believe will be evident this month. El Niño development. The Southern Oscillation Index (SOI) has plunged into negative territory, which should trigger El Niño concerns.

¨       Inventory plunge. Malaysia’s palm oil inventory was already at a 2013 trough of 1.66m tonnes, with another 2 to 3 months before hitting trough. We believe palm oil inventory could fall below 1.4m tonnes, giving rise to supply concerns and resulting in a further narrowing of its discount to soybean oil. Oil World now expects palm oil to trade at a premium to soybean oil within the next two months due to tight supply.

¨       Palm oil export. There is a sharp decline in palm oil shipment to India this year, which we believe could be due to the narrow discount to soybean oil, and to a smaller extent, less palm oil available for export from Indonesia. Shipments to China, on the other hand, were stronger in the first two months this year, although not enough to offset the lower shipments to India.

¨       US planting intention. The just announced US planting intention shows that farmers favour soybean over corn in the upcoming planting. The four straight weeks of long liquidation in soybean speculative positions have probably reflected this. Following the release of the prospective planting report, we believe soybean price will start to resume its rally. Palm oil’s supply tightness will not be affected by an increase in soybean acreage.

¨       Reload position. We believe the sector’s price correction is close to ending. With the bull market intact, investors who did not participate in its earlier rally should take the opportunity to load up on plantation stocks.

Best regards,

RHB OSK Indonesia Research Institute