• CPO prices holding up
• Expects production growth closer to 20%
• Few near term catalysts

House View on CPO Outlook Recently Upgraded

The Malaysian Palm Oil Board released data yesterday that showed an 8.8% MoM rise in Malaysia’s palm oil stocks, a 0.9% decline in palm oil production while exports were up 6.4%. Recall that our view on CPO price outlook had been bearish, given the higher CPO production expected in 2017, sustained low oil prices, and healthy global alternative oilseed production weighing on overall oilseed prices.

Recently, OCBC Treasury Research revised their CPO outlook from MYR2,250 to MYR2,600/MT by year-end, mainly due to the fall in crude oil production levels especially seen in Malaysia for the month of Jun, and overall demand for palm oil was deemed healthy in the first seven months of 2017.

This estimate also lies within Golden Agri’s anticipations of around US$600-700/MT, underpinned by expectations of demand and restocking by key markets including China and India. Note that these supply and demand factors have supported CPO prices, with prices up ~4% for the past month.

Long Term Initiatives are in Place

As of 2Q17, the group has seen good production growth and expects FY17 production to be closer to a ~20% growth along with largely steady prices. While their estates’ average age of ~16 years (including plasma) is often considered as one of the oldest among plantation peers, we acknowledge the group’s initiatives to sustain growth in the longer term. This includes having two clones of high-yielding oil palm planting material that could potentially increase yields to above Indonesia’s industry average yields.

Replanting activities with the higher-yielding seeds may accelerate next year and could help them attain a favourable age profile. In addition, the group is also looking to improve long-term margins for the downstream segment, via strengthening the integration and efficiency along the supply chain.

Product portfolio continues to extend alongside increasing sales of palm-based refined products, while capacity is expanding in areas such as for kernel crushing in South Kalimantan.

Keeping Our View

Overall, in consideration of the nearer term outlook with few catalysts, we keep our HOLD rating and unchanged fair value estimate of S$0.36.

Source: OCBC Research - 12 Sept 2017