More positive on CPO price; upgrade earnings and price targets

Transcription

1 Deutsche Bank Markets Research Asia Malaysia Industry Asian Palm Oil Industry Date 15 November 213 Recommendation Change More positive on CPO price; upgrade earnings and price targets Raising CPO price assumptions We have turned positive on CPO price and expect production to surprise the market on the downside in while demand should remain robust. Further catalysts include new land regulations in Indonesia that should slow plantings longer term while mandated biodiesel blending is a potent driver for new CPO demand growth. Consequently, we have put ourselves at the top end of consensus, increasing our average CPO price forecasts by 8% in 214E to RM2,8/MT and 215E by 7% to RM2,9/MT. We have raised earnings and target prices for all plantation stocks under coverage and have upgraded them to Buy. Specifically, our top Buy picks are GGR, KLK and WIL. A tightening supply picture meets CPO inventories are likely to ease as a result of slower global production growth of 4.% in 214E and 3.8% in 215E driven by 1) tree stress following high production cycles in , 2) lingering impact of El Nino weather on the palm trees, 3) a slowdown in growth of mature hectarage, especially in Indonesia as companies pulled back expansion exercises during the global financial crisis as well as selective restraint in terms of planting to enable companies to be environmentally certified (i.e. not planting on peat land or cutting down rainforests). a robust demand backdrop We are bullish on palm oil demand in 214E and 215E, projecting 7.9% p.a. growth in consumption. The risks to estimates is biased to the upside, a view underpinned by 1) our upbeat economic outlook for 214E and 215E, 2) continued rapid growth in key developing nations, such as India and China, and 3) positive influence of biodiesel off take globally. Meanwhile, we note that domestic port inventories of palm oil in China have eased to a 2-month low. Re-stocking activities in China and India should be supportive of a stronger CPO price in the near-to-midterm. China and India together account for 26.4% of palm oil demand annually. Raising target prices for all stocks under coverage; all Buy rated now We have raised earnings and target prices for all plantation stocks under coverage. We prefer stocks with the optimal combination of (1) the highest palm oil earnings component, 2) highest CPO price sensitivity and 3) liquidity. Our top picks for the sector are GGR and KLK. We also like WIL for its market leadership in China, exposure to growing food demand, buoyed by strong economic growth in emerging economies and not so much as a proxy to raising CPO prices per se. KLK is our preferred pick for Malaysian exposure given implied upside to our price target and the group s strong plantation output growth profile and corporate governance culture. Our earnings estimates are on average 17-18% ahead of consensus FY14-15E, respectively, due to our more bullish CPO price forecasts. Risks to our outlook on CPO price and plantation equities are 1) a strong rise in soybean production in the US in 2H14, 2) global economic slowdown, 3) changes in government regulations on plantation land ownership, 4) a surge in plantation-related costs such as labor and fertilizer costs and 5) significant US dollar strength. Michelle Foong Research Analyst (+6) michelle.foong@db.com Jovin Ng PT Deutsche Bank Verdhana Indonesia Research Analyst (+62) jovin.ng@db.com Key Changes Company Target Price Rating SIME.KL 8.1 to Hold to Buy 1.6(MYR) FGVH.KL 3.1 to 4.8(MYR) Sell to Buy GAGR.SI.5 to.75(sgd) Sell to Buy LSIP.JK 1,35. to Hold to Buy 2,3.(IDR) AALI.JK 17,2. to Hold to Buy 24,3.(IDR) WLIL.SI 3.7 to 4.4(SGD) Hold to Buy KLKK.KL 17.1 to 27.(MYR) 4.1 to 6.(MYR) Sell to Buy This research has been prepared in association with PT Deutsche Bank Verdhana Indonesia. The opinions contained in this report are those of PT Deutsche Bank Verdhana Indonesia. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 54/4/213. IOIB.KL Source: Deutsche Bank Top picks Golden Agri-Resources (GAGR.SI),SGD.58 Kuala Lumpur Kepong (KLKK.KL),MYR23.12 Wilmar International (WLIL.SI),SGD3.55 Source: Deutsche Bank Upside potential Shr price Target price Sell to Buy Buy Buy Buy Upside (%) FGV % IOI % KLK % SIME % GGR % WIL % AALI 21,55 24,3 12.8% LSIP 1,82 2,3 11.5% Source: Deutsche Bank This report changes ratings, target prices and/or estimates for several stocks under our coverage. For details see Figure 25.

2 15 November 213 Raising forecasts Get set for an up-cycle CPO price was a laggard for most of 213E versus its competing edible oils such as soybean oil. However, with improving fundamentals going into 214 i.e. tightening supply outlook amid still robust consumption growth, continued rapid economic growth in key developing markets and increasingly positive influence of biodiesel off take, we are now bullish on the CPO price going into 1Q14. Consequently, we have raised our palm oil forecasts by 7.7% and 7.4% to RM2,8/MT and RM2,9/MT, respectively, and introduce our 216 forecast of RM3,/MT. This compares with the current CPO price of RM2,58/MT and YTD average of RM2,38/MT. Our 214 CPO estimates are 4-12% above the markets expectation of RM2,5 RM2,7/MT over the same period. Figure 1: Deutsche Bank CPO price forecasts for E (RM) E 214E 215E 216E New 2,9 2,3 2,8 2,9 3, Previous NA 2,3 2,6 2,7 na Change (%) NA.% 7.7% 7.4% na % YoY chg -11.4% -2.7% 21.7% 3.6% 3.4% Source: Deutsche Bank estimates, Bloomberg Finance LP for 212 data Slower production growth + robust demand = upside risk to CPO price Easing inventories and slower production growth ahead We expect CPO inventories to ease as a result of slower global production growth of 4.% in 214E and 3.8% in 215E driven by 1) tree stress following high production cycles in , 2) lingering impact of El Nino weather on the palm trees, 3) a slowdown in growth of mature hectarage, especially in Indonesia in as companies pulled back expansion exercises during the global financial crisis, faced delays in land clearing due to social issues as well as adopted a selective restraint in terms of planting to to be environmentally certified (i.e. not planting on peat land or cutting down rainforests). We now expect palm oil stock/usage ratio to ease from 16.6% in 213 to 15.7% and 11.1% in 214 and 215, respectively. Page 2

3 15 November 213 Figure 2: Inventory levels in Malaysia Figure 3: Lower stock-usage ratio in E to be supportive of CPO price million tonnes Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 RM 3,5. 3,. 2,5. 2,. 1,5. 1,. 5. M tonne 2.% 18.% 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.% Ending stock (million tonnes) - LHS CPO price (RM per tonne) - RHS F214F215F Stock/usage (%) CPO price (RM/MT).% Source: Deutsche Bank, MPOB, Bloomberg Finance LP Source: Deutsche Bank, Oil World, Bloomberg Finance LP Figure 4: World demand and supply for Palm Oil Year E 214E 215E Opening Stock Malaysia Indonesia Others Total Production Net Export EU China India Others Total Consumption Ending Stock Stock/usage 17.8% 15.3% 13.4% 14.9% 15.6% 16.4% 15.8% 17.5% 16.% 12.6% 1.5% 14.1% 16.6% 15.7% 11.1% Production growth n.a 5.2% 1.8% 7.6% 12.7% 7.4% 4.4% 13.% 4.% 2.9% 9.3% 7.9% 8.4% 4.% 3.8% Consumption growth n.a 7.3% 1.8% 4.7% 13.% 7.5% 5.4% 1.1% 8.5% 4.7% 7.4% 3.7% 7.% 7.9% 7.9% CPO price (RM/MT) 896 1,343 1,572 1,664 1,395 1,514 2,461 2,856 2,244 2,745 3,283 2,862 2,3 2,8 2,9 Source: Oil World, USDA, Deutsche Bank estimates New land regulations in Indonesia to slow longer-term supply Malaysian mature hectarage of palm plantations and CPO production growth has stagnated for some time. It is now all about Indonesia and possibly Africa longer term, which remains the primary frontier of planting expansion. The Indonesian government issued new regulations on plantations land (Agriculture Minister No ) in July 213 which was implemented in September 213 states that: A conglomerate (corporations with related management/partly owned by same major shareholder/legal entity) can only own a max of 1, ha of Page 3

4 15 November 213 plantation land. The restrictions apply to monoculture. Plantation companies can still add new land if the land is used for planting non-palm trees. Limitation will not apply to State Owned Companies, Regional Owned Companies, Cooperatives or public companies. The regulation is not retroactive, i.e. existing plantation licenses will remain in force but application for new licenses will be affected. The land cap restriction excludes Papua and West Papua which is capped at 2, ha. The government also requires that a company that has a license in palm oil processing plant divests some of its shares to a farmer cooperative. The divestment will range from 5-3% commencing from the 5 th to 15 th years of operation. Plantation companies we spoke to highlighted uncertainties over the new regulations in relation to 1) the 1, ha cap on public companies. The current regulation seem to suggest that publically listed companies in Indonesia (AALI, LSIP, IFAR) are exempt from the land cap restrictions while foreign listed companies such as WIL, GGR, KLK, SIME which have significant plantation holdings in Indonesia will be impacted; 2) ability for both foreign and domestic operators to acquire and transfer licenses for plantations ( IUP ), cultivation ( IUP-B ) and processing activities ( IUP-P ) through M&A with private companies that already have existing licenses. More clarity from the Indonesian government on the definitions in the new regulations is required; we believe that it is likely that the overhang will only be addressed after the elections. As we go through annual reports of listed companies with plantation exposure in Indonesia, we conclude that 1) most of the listed plantation group (WIL, SIME, KLK, GGR, AALI, LSIP, etc.) have already hit/exceeded the 1, ha planted area cap and that 2) the rate of new planting has dropped sharply in and expansion is expected to slow in given recent restrictions. This is so as 1) land banking opportunities in Indonesia would become more expensive given the scarcity of plantation land that are already licensed and 2) companies not already listed in Indonesia will need to review the potential need to separately list their Indonesian plantation assets locally in order to expand. Figure 5: Plantings by major plantation companies in Indonesia (' ha) Golden Agri Indofood Agri Astra Agro Bumitama First Resources Wilmar Sime Darby KL Kepong Bakrie Sumatera BW plantations Total planted area , , , , ,869. 1,936.2 % YoY.% 76.6% 6.7% 12.5% 11.2% 6.3% 1.7% 3.6% Net add of planted area (ha) Source: Deutsche Bank, company annual reports and only accounts for the planted area in Indonesia Page 4

5 15 November 213 Figure 6: Mature hectarage in Malaysia has stagnated 5, Malaysia - Mature hectarage (Ha) 1.% 4,5 8.% 4, 3,5 6.% 3, 4.% 2,5 2, 2.% 1,5.% 1, -2.% 5 Figure 7: Indonesia s growth likely to slow further with the new regulations 8, Indonesia - Mature hectarage (Ha) 3.% 7, 25.% 6, 2.% 5, 4, 15.% 3, 1.% 2, 5.% 1, Malaysia (Ha) (LHS) % YoY (RHS) E 214E -4.% Indonesia (Ha) (LSH) % YoY (RHS) E 214E.% Source: Deutsche Bank, Oil World, MOPB Source: Deutsche Bank, Oil World, GAPKI Page 5

6 15 November 213 Figure 8: Details of the new land regulations in Indonesia Subject Old regulation (made in 27) Proposed new Regulation (draft dated 16 July 213) 1 Permissible area for plantation Permissible plantation area for one Company license ( Izin Usaha Perkebunan a. -IUP ) Palm Oil: 1, (ha) b. b. Tea: 1, (ha) 2 Permissible area for cultivation of plantation crop 3 Divestment of shares for processing crude palm oil ( CPO ) plantation c. c. Sugar Cane: 15, (ha) Permissible plantation area for one company or a corporate group a. Palm Oil: 1, (ha) b. b. Tea: 2, (ha) c. c. Sugar Cane: 15, (ha) No limitation a. Oil palm: 25 1, ha No requirement b. Tea: ha c. Sugar cane: 25 2,ha A company that exceeds these limits shall be integrated with industry in processing plantation product. Requires a ( Izin Usaha Perkebunan untuk Pengolahan: IUP- P ) company which received a processing license to divest some of its shares to a local farmer. - The stock divestment process shall take place gradually, ranging from 5% to 3%, and - Commences from the 5th year to the 15th year of operation. 4 Facilitation to local farmers Same as new regulation. Plantation company which is applying for IUP-B or IUP license of 25 ha or more, shall facilitate the formation of farm of at least 2% the total area of IUP-B or IUP. 5 Plantation Partnership Agreement Partnership agreement shall be conducted between the company and farmers, employees and/or local residents for a minimum 3 year term. 6 Requirements to obtain license Plantation company which has received IUP-P or for increased processing capacity IUP and intends to expand its processing capacity by 3% shall submit a progress report and its financial statements 7 Limitation on land clearing as part of the preparation to form a farm No requirement 8 Rights to land Plantation company which has received IUP-B, IUP- P or IUP shall resolve the rights over the land within 2 years from the issuance of IUP-B, IUP-P or IUP. 9 Administrative sanction on divestment 1 Administrative sanction on rights to land 11 Administrative sanction on land clearing None Partnership agreement shall be conducted between the company and farmers, employees and/or local residents for a minimum of 4 year term. Plantation company which has received IUP-P or IUP and intends to expand its processing capacity by 3% shall submit a progress report and its financial statements for the prior 3 years. Plantation company which has received IUP-B, IUP-P or IUP may prepare to form a farm by clearing the land for seed preparation, seeding, manufacturing facilities and infrastructure at a maximum of 1 ha. Plantation company which has received IUP-B, IUP-P or IUP and uses state-owned land shall obtain Cultivation Right on Land ( Hak Guna Usaha or HGU ) within 2 years from the issuance of IUP-B, IUP-P or IUP. Plantation company that does not divest its shares to a farmer cooperation will be given 3 warning letters within 4 months to conduct the divestment. In the event the 3rd warning letter is not obeyed, the IUP-P will be revoked and the rights to land will be revoked by the relevant institution. None Plantation company that does not obtain HGU within 2 years of the issued license will be given 3 warning letters within 4 months to complete the procedure. In the event the 3rd warning letter is not obeyed, the license will be revoked. None Plantation company that clears land for seed preparation, seeding, manufacturing facilities and infrastructure in excess of 1 ha will receive a warning to cease activities. If within 3 months of issuance of such letter the company has yet to cease land clearing activities the license will be revoked. 12 Transitional provisions No requirements a. Plantation company which has received HGU but not its business licenses before the Proposed Regulation is implemented shall obtain IUP-B, IUP-P, or IUP within 1 year of the Proposed Regulation coming into effect. Source: O Melveny & Myers LLP b. Plantation company which has received IUP-P before this regulation is implemented shall possess a farm within 3 years. c. Plantation company which has received IUP-B, IUP-P or IUP before this regulation is implemented and has started to build a farm and/or the processing unit without having the rights to land shall complete the rights in 2 years. Page 6

7 15 November 213 Demand to remain robust; re-stocking activities supportive in the near term We are bullish on palm oil demand in 214E and 215E, projecting 7.9% p.a. growth in consumption. The risks to estimates is biased to the upside, a view underpinned by: 1) our upbeat economic outlook for 214E and 215E, 2) continued rapid growth in key developing nations such as India and China and 3) positive influence of biodiesel off take globally. Meanwhile, we note that domestic port inventories of palm oil in China have eased to a 2-month low. Re-stocking activities in China and India should be supportive of a stronger CPO price in the near-to-midterm. China and India together account for 26.4% of palm oil demand annually. Figure 9: World economic growth to sustain palm oil demand while biodiesel a potent factor for upside Figure 1: Restocking to drive demand - China palm oil inventories at domestic ports are at a 2-month low 1.6 China - Palm Oil inventories at domestic ports (mmt) E 214E 215E Palm Oil consumption growth (%) (LHS) World GDP Growth (%) (RHS) Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 Dec-11 Nov-11 Oct-11 Sep-11 Aug-11 Jul-11 Jun-11 May-11 Source: Deutsche Bank, World Bank data, Oil World Source: Deutsche Bank, China Figure 11: World and Asia GDP growth outlook % F 214F China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Emerging Asia* EM Asia ex China & India* Euroland US Japan World Source: Deutsche Bank estimates, Reuters, Bloomberg Finance LP, World Bank Page 7

8 15 November 213 Growth in biodiesel demand a potent driver for upside in CPO prices It is worth looking at the impact of a stronger biodiesel off take globally as it can significantly impact the level of inventories of edible oils. The implementation of biodiesel mandates by governments around the world has resulted in biodiesel demand become increasingly inelastic to crude oil prices on the downside. At the same time, any spike in crude oil prices should have a notable impact on biodiesel demand as it would release biodiesel demand from its reliance on government subsidies and mandatory blending targets, we believe. Based on consumption estimates by the International Energy Agency (IEA) and Oil World, the edible oils market is about 4% of the crude oil market while biodiesel demand currently accounts for.6% of the crude oil market. If 1% of fuel demand currently satisfied by crude oil spills over to the edible oils market via biodiesel, it would mean a 24% increase in edible oils demand. The leverage is significant, in our view. Figure 12: Price of crude oil versus global biodiesel production; increasingly more inelastic 16 US$/bbl mmt Jan-13 Jan-12 Jan-11 Jan-1 Jan-9 Jan-8 Jan-7 Jan-6 Jan-5 Jan-4 Jan-3 Jan-2 Jan-1 Price of crude oil (US$/bbl) Biodiesel production globally (mmt) Source: Deutsche Bank, EIA, Bloomberg Finance LP Figure 13: Edible oils market vs. crude oil market crude oil has tremendous leverage on edible oils via biodiesel mmt Remarks Crude oil consumption 4,445.9 Consumption (212) Edible oils Consumption (212) Edible oils as % of crude oil 4.2% Biodiesel 26.8 Consumption (212) Biodiesel as % of crude oil.6% Biodiesel as % of edible oils 14.2% Source: Deutsche Bank, EIA, Oil world Figure 14: What happens if 1% of crude oil spills over to biodiesel? mmt Remarks Edible oils consumption Using above estimates as base Increase of edible oils demand for biodiesel 44.5 Using above estimates as base Increase of edible oils demand for biodiesel (%) 23.6% Biodiesel as % of edible oils 3.6% Source: Deutsche Bank estimates Page 8

9 15 November 213 Figure 15: Global biodiesel mandates Country Current Mandate (212) Target Mandate announced in 213 Comments Americas Argentina B7, from B5 in 21 B1 (213) High soybean oil prices are delaying the target. Brazil B5 B1 (214) and B2 (22) 82% of Brazil's biodiesel from soybean. Uruguay B2 B5 (213) Has a B2 biodiesel policy, but not mandatory. US Europe 213 Renewable Fuel Standard: Biomassbased diesel 1.28bn gallons; Renewable fuel blended by 222. eligible for a federal tax credit of $1 per Target to have 36bn gallons of renewable Biodiesel blenders are also currently Fuel: 16.55bn gallons gallon blended. The 1.28bn gallons represent 1.13% volume of non-renewable gasoline and diesel volume. In 213, about 1% of all fuel used will be from renewable sources. (Biofuel + biomassbased diesel) EU Has a 5.75% mandate directive in place 1% renewable energy in all transport fuel Provisional duties imposed in May-13 on biodiesel imported from Argentina and Indonesia. Asia Pacific Australia B2 (New South Wales) - China - B1 Fiji - Voluntary B5 (212), but not happening India - B2 (217) - Between EUR per tonne on biodiesel imports from Argentina. - Between EUR per tonne on imports from Indonesia. Final duties, which are slightly higher, should be in place by the end of November. Indonesia B1 About 9% of Indonesia's biodiesel exports of 1.5mkl went to the EU in 212. Malaysia B5 B1 (by 214) Philippines B2 B5 South Korea B2.5, from B2 this year. - M sia palm oil imports accounted for 32.2% of South Korea's oil imports during 21 Thailand B5. from B4 (starting this month) - Source: Biofuels Digest, various press articles CPO price to play catch-up to competing oils on tightening supply Deutsche Bank and the Oil world continue to expect soybean prices to stay elevated to ensure South American planting and there is also a weather premium given the drought in Argentina which is becoming increasingly more serious. In 213, CPO price discount widened more than historical averages against most of its competing oils due to the build-up of inventory of CPO and strong production. Given tightening supplies of CPO, we expect the discount gap between CPO vs. soybean oil and rapeseed to narrow, with an upside bias. We are watching supply issues more closely because the CPO price volatility to the stocks/usage ratio has risen strongly over time. This is thanks to a variety of factors: 1) a greater involvement of financial funds in the commodities market; 2) the entry of crude oil into the edible oil equation; 3) rising weather volatility courtesy of global warming and 4) the rise of two main pillars of demand China and India. Notably the beta of the price of CPO to stocks/usage ratio has increased manifold in the past two decades, suggesting a small shift in this ratio can have a strong impact on prices. Page 9

10 15 November 213 Figure 16: Deutsche Bank commodities price forecasts E 214E 215E 216E Brent % YoY chg 3.5% -2.7% -2.5% -1.2% -4.8% Soybeans (USD/bushel) % YoY chg 18.4% -.3% -8.9% -2.1% -1.7% Soybean Oil (USc/lb) % YoY chg -6.6% -5.9% -5.1% 5.8% -5.5% CPO (RM/MT) 2,9 2,3 2,8 2,9 3, % YoY chg -11.8% -2.7% 21.7% 3.6% 3.4% Source: Deutsche Bank estimates, Bloomberg Finance LP, Oil World, USDA Figure 17: CPO discount gap to soybean oil and rapeseed oil has remained elevated all of 213 US$ per tonne(fob) May-99 Dec- Jul-2 Feb-4 Sep-5 Apr-7 Nov-8 Jun-1 Jan-12 Aug-13 Crude Palm Oil Soyabean Oil Rapeseed Oil Figure 18: After an extended period of underperformance in 213, CPO are finally catching up to crude oil prices 1,6 US$/MT 1,4 1,2 1, Jul-13 Oct-12 Jan-12 Apr-11 Jul-1 Oct-9 Jan-9 Apr-8 Jul-7 Oct-6 Jan-6 Apr-5 Jul-4 Oct-3 Jan-3 Apr-2 Jul-1 Oct- Jan- CPO (US$/MT) Brent (US$/MT) Source: Deutsche Bank, Oil World Source: Deutsche Bank, Bloomberg Finance LP, Oil World Figure 19: CPO price relative to soybean oil prices (%) Figure 2: CPO price relative to rapeseed oil prices (%) 1% 1% % -1% % -1% -2% -2% -3% -4% -3% -5% -4% -6% -7% -5% Mar-99 Oct- May-2 Dec-3 Jul-5 Feb-7 Sep-8 Apr-1 Nov-11 Jun-13-8% Mar-99 Oct- May-2 Dec-3 Jul-5 Feb-7 Sep-8 Apr-1 Nov-11 Jun-13 Source: Deutsche Bank, Oil World Source: Deutsche Bank, Oil World Page 1

11 15 November 213 3Q13 results review/preview: another weak quarter Four (GGR, WIL, LSIP, AALI) out of eight companies in our coverage universe have reported 3Q13 plantation operational results that are below expectations or dismal due to weak CPO prices and slower production growth as a result of adverse weather conditions during the quarter. The trend should be similar for the rest of the Malaysian plantation companies that are due to report results over the next two weeks. As expected, integrated players with substantial downstream, such as KLK, IOI, SIME, FGV and WIL, should outperform purer upstream operators, such as GGR, LSIP and AALI, due to lower feedstock costs and improvements in crushing margins. Figure 21: Upcoming reporting season Company Expected date of results announcement FYE KLK 2-Nov 4Q13 IOI Week of 18th Nov 1Q14 FGV 29-Nov 3Q13 SIME 29-Nov 1Q14 Source: Deutsche Bank, company Sector valuations and outlook; GGR, KLK and WIL are our top picks Our earnings upgrade takes into account changes in 1) our more bullish CPO price forecasts, 2) marginally slower pace of cost of production increases led by lower fertilizer costs which have corrected c.25.1% YoY partially offset by increases in minimum wage in both Indonesia and Malaysia and 3) sustained production growth. As a result of the CPO price upgrade, we have raised earnings by an average of 2% in FY14E and 18% in FY15E and target prices for all stocks under coverage. We upgrade all stocks to Buy. We prefer stocks with the optimal combination of: 1) the highest palm oil earnings component, 2) highest CPO price sensitivity and 3) liquidity. Our top picks for the sector are GGR and KLK. We also like WIL, not so much as a proxy to raising CPO prices per se but for its market leadership in China, exposure to growing food demand, buoyed by strong economic growth in emerging economies such as China and India. KLK is our preferred pick for Malaysian exposure given the group s strong plantation output growth profile, large downstream operations and good corporate governance culture. Our earnings estimates for companies under coverage are on average 17-18% ahead of consensus FY14-15E, respectively, due to our more bullish CPO price forecasts and margin recovery. We continue to use price-to-earnings ratio and discounted cash flow as our main valuations methodologies for the plantation stocks due to the sector s sustainable earnings growth and strong cash flow generation. We have used sum-of-the-parts valuation for companies with other non-plantation operations. All our valuations are based on one-year forward earnings estimates. Historically, during periods of a CPO price rally, the stocks tend to outperform and break above their mid-cycle valuations. Rolling our valuations 1-year forward and in view of an earnings recovery, margin improvements and a more bullish CPO price outlook, we have raised target prices of all the stocks under our coverage by an average of 44%. We have pegged our price targets on historical average valuations of the respective companies. Page 11

12 15 November 213 Figure 22: Earnings sensitivity NP chg to 1% change in CPO price NP chg to 1% change in CPO production FY14 FY15E FY14 FY15E IOI 1.%.9%.9%.9% KLK 1.4% 1.4%.8%.8% SIME 1.4% 1.4%.5%.5% FGV 2.6% 2.3%.5%.5% GGR 3.2% 3.%.7%.7% WIL.9% 1.%.2%.3% LSIP 2.1% 2.1%.8%.8% AALI 1.8% 1.8% 2.1% 2.1% Source: Deutsche Bank Figure 23: Historical PER vs. current valuations Peak (28) Trough (29) Mid Current (CY14E) Premium/Discount to mid-cycle valuations (%) SIME % IOI % KLK % WIL % GGR % AALI % LSIP % CPO price 3,21 2,186 Source: Deutsche Bank Figure 24: Tree age profile of the plantation companies Planted area age profile - total planted area (ha) FGVH SIME GGR AALI WIL KLK IOI LSIP Immature (-3) 72,719 58,348 47,117 38,564 14,93 38,265 18,551 11,75 Young (4-9) 68,679 67,815 91,849 82,131 52,254 55,145 13,543 14,158 Mature (1-2) 64,639 29, , ,299 87,713 76,831 16,259 53,25 Old (21+) 197,958 18, ,797 na 31,726 22,989 22,273 7,86 Total 43, , , , , ,23 16,626 85,344 % of total planted area* FGVH Sime Darby Golden Agri Astra Agro Wilmar KLK IOI Corp LonSum Immature (-3) Young (4-9) Mature (1-2) Old (21+) Total Source: Deutsche Bank, company data Page 12

13 15 November 213 Figure 25: Changes in our recommendations, earnings and target prices Company Price New Rec Old Rec NP Change (%) 2-year EPS CAGR FY14E FY15E Previous TP Implied PER PER (x) at TP (x) New TP (local cy) Old TP (local cy) TP Upside/ change Downside (%) FGV 4.3 Buy Sell 15.2% 11.7% 26.6% % 11.6% IOI 5.41 Buy Sell 13.4% 22.5% 12.4% % 1.9% KLK 23.2 Buy Sell 14.1% 2.6% 26.4% % 16.4% SIME 9.5 Buy Hold 18.1% 11.2% 7.6% % 11.6% GGR.59 Buy Sell 1.1% 3.1% 53.1% % 27.8% WIL 3.55 Buy Hold 7.5% 3.9% 14.2% % 23.9% AALI 21,55 Buy Hold 36.5% 26.8% 42.5% ,3 17,2 41.3% 12.8% LSIP 1,82 Buy Hold 45.2% 42.4% 38.8% ,3 1,35 5.4% 11.5% Source: Deutsche Bank estimates Figure 26: Deutsche Bank vs. consensus estimates Local Deutsche Bank Consensus Estimates Variance (%) Currency FYE FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 Sime Darby* MYR m 6/213 4,5 4,39 4,641 3,56 3,817 4,97 14% 15% 13% FGV MYR m 12/ , % 19% 22% IOI Corp* MYR m 6/213 1,868 2,192 2,362 1,852 2,37 2,22 1% 8% 7% KLK MYR m 9/ ,32 1, ,165 1,281 3% 13% 2% Wilmar USD m 12/212 1,369 1,6 1,784 1,32 1,448 1,611 4% 11% 11% Golden-Agri USD m 12/ % 15% 14% LonSum IDR bn 12/ ,157 1, % 49% 39% Astra Agro IDR bn 12/212 1,461 2,643 2,817 1,653 2,234 2,528-12% 18% 11% Source: Deutsche Bank, Bloomberg Finance LP, *SIME and IOI are based on FY14-16E estimates Golden Agri: Most leveraged play to CPO price rally As a result of weaker-than-expected 9M13 earnings, we have cut our FY13 earnings estimates for GGR by 31% and have raised GGR s FY14-15E earnings by 1% and 3%, respectively, to take into account our new CPO price forecasts and margin improvements on slower cost of production increases. We upgraded the stock to Buy from Sell. This is the stock with by far the largest leverage to CPO price assumptions. It also has the highest risk profile, in our view, as almost 1% of its earnings are from palm oil, be it crude or processed. Every 1% change in CPO price assumption would lead to a 4% change in GGR s FY14E earnings. Following our earnings increase in FY14-15E, we have rolled our EPS one year forward and raised our price target for GGR to S$.75/share. Our revised price target is based on 15x one-year forward PER valuations, close to its historical average. Downside risks to the stock include a bear market in palm oil, large increase in plantation-related costs, notably fertilizers. Figure 27: GGR - changes in our earnings estimates FYE Dec New Old Change (%) (US$m) 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 6,589 7,386 7,954 6,852 6,721 7,557-4% 1% 5% EBITDA , ,5-18% 1% 5% EBITDA margin (%) 9% 13% 13% 1% 12% 13% -1% 1% % Net Profit % 1% 3% Source: Deutsche Bank estimates Page 13

14 15 November 213 Kuala Lumpur Kepong: Our preferred Malaysian exposure We have raised our net earnings forecasts for KLK 14% and 21% in FY14-15E and upgraded the stock to a Buy from Sell. This remains our preferred pick for an integrated Malaysian exposure, stronger earnings growth, upside to target price and the group s strong plantation output growth profile given a later percentage of maturing hectarage. The latter is a function of its previous investments, especially in Indonesia. Meanwhile, KLK s balance sheet remains healthy with a net gearing of C. 14% and 15%, respectively, for FY14-15E. This should allow the group to still gear up for opportunistic M&A. Case in point, in light of restricted land-banking opportunities in Indonesia given the new regulations, KLK have started venturing further into Africa and have recently announced the acquisition a majority stake in a Singapore-registered company which owns long-term concessions in Liberia for plantation cultivation. We have pegged KLK s price target at 21.2x its 1-year forward PER, in line with its 5-year historical average up-cycle valuation trends. The stock tends to trade at a premium to its Malaysian listed peers due to its strong management track record and favorable tree profile. Key downside risks: A major downturn in CPO or soybean prices, further deterioration in the economy. Figure 28: KLK changes in our earnings estimates FYE Sept New Old Change (%) RMm 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 9,939 11,538 12,898 9,939 11,431 12,29-1% 6% EBITDA 1,742 2,269 2,613 1,742 2,5 2,256-11% 16% EBITDA margin (%) 18% 2% 2% 18% 18% 18% - 2% 2% Net Profit 964 1,32 1, ,157 1,277-14% 21% Source: Deutsche Bank Wilmar: A proxy to emerging markets food demand We have kept WIL s FY13E earnings unchanged given in-line 9M13 results and have raised FY14-15E earnings by 8% and 4%, respectively, to take into account stronger CPO prices and stronger sales volume for biodiesel. We have upgraded the stock to Buy (from Hold) as a result of a 26% potential upside suggested by our new price target. The company has the lowest earnings sensitivity to CPO price and should not be played as a direct proxy to the CPO price cycle per se. We are of the view that WIL is a proxy to food demand in Asia. Group earnings are driven by demand, capacity and new business initiatives, i.e. flour and rice in China as well as expansion of its business into Africa and India. Risks to Wilmar s earnings are driven by volatility of its feedstock costs, trading positions of its edible oils and oilseeds, slim margins and the difficulty in forecasting commodity prices. Given that the group s strong track record and its market leader position in China s oilseeds processing industry and dominance in terms of processing palm oil from a global perspective, we give the company the benefit of the doubt that it is able to generate positive returns on its trading positions. We have raised our SOTP-based target price by 19% to S$4.4 (from S$3.7 previously). We derive our SOTP-based price target by valuing its upstream plantation at 18x FY14E PER, processing divisions at 15x FY14E PER and downstream consumer product at 16x FY14E PER. These multiples are based on peer averages. In addition, we have ascribed a 5% discount at the group Page 14

15 15 November 213 level to factor in risks of diversification into non-core assets. At our price target, WIL would trade at 14x FY14E PER, in line with its 5-year historical average and stronger 2-year earnings CAGR of 14%. Key downside risks for the stock includes changes in regulations for foreign operators in China, losses in trading/hedging of oilseeds and palm oil purchases and an economic slowdown. Figure 29: WIL changes in our earnings estimates FYE Dec New Old Change (%) (US$m) 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 44,29 5,184 54,862 44,29 5,59 54, %.2% EBITDA 2,486 2,823 3,112 2,486 2,684 3,27-5.2% 2.8% EBITDA margin (%) 6% 6% 6% 6% 5% 6% -.3%.1% Net Profit 1,369 1,6 1,784 1,369 1,489 1, % 3.9% Source: Deutsche Bank estimates Sime Darby: Plantations support earnings growth in FY14E We have raised Sime s FY14-15E earnings by 18% and 11%, respectively, and introduced FY16 estimates. Plantations account for c.25% and c.53% of FY14-15E revenues and operating profits, respectively, and should help sustain earnings growth although there is still low visibility on prospects of its other business segments. We upgrade SIME to Buy from Hold. Our SOTP-derived price target for SIME is based on 18x PER for its plantation operations, 14x PER for property development, 1x PER for Industrial and Energy & Utilities and 12x PER for Automotive. Our new price target implies a 1-year forward valuation of 15x PER. Key downside risks for the stock include economic slowdown affecting SIME s non-plantation businesses (i.e. property, motors, Caterpillar distribution franchise, etc.), a bear market in palm oil and large increases in plantationrelated costs such as labor and fertilizer costs. Figure 3: SIME changes in our earnings estimates FYE Jun New Old Change (%) RMm 214E 215E 216E 214E 215E 214E 215E Sales 5,5 53,528 56,655 56,257 56,257-11% -5% EBITDA 7,391 8,3 8,534 6,759 7,745 9% 3% EBITDA margin (%) 15% 15% 15% 12% 14% 3% 1% Net Profit 4,5 4,39 4,641 3,392 3,947 18% 11% Source: Deutsche Bank estimates IOI: Waiting for the de-merger of its property and plantation business Incorporating our new CPO price forecast, we have raised IOI s FY14-15E earnings by 13% and 23% and introduced our new FY16 forecasts. We have continued to assume the property business in the current listed company as the completion of demerger between the plantations and property business is only expected to complete early 214. IOI has a low growth profile for its plantations which is mitigated by strong plantation yield management and improving performance of its downstream businesses. Page 15

16 15 November 213 We have raised the stock from a Sell to a Buy. Our RM6/share price target for IOI is based on 2x 1-year forward PER valuations. We are of the view that the up-coming de-merger exercise between its property and plantations business will be supportive of the share price in the near term given the potential upside that an investor who had subscribed to the renounceable offer for sale would enjoy once the property business is listed. For Malaysian plantation exposure, we continue to prefer KLK for greater bottom line sensitivity to CPO price. Downside risks for IOI include overpaying for its acquisitions for growth, delay in the de-merger exercise, a bear market in palm oil and large increases in plantation-related costs such as labor and fertilizer costs. Figure 31: IOI changes in our earnings estimates FYE Jun New Old Change (%) RMm 214E 215E 216E 214E 215E 214E 215E Sales 17,116 18,867 2,388 17,837 19,166-4% -2% EBITDA 2,89 3,356 3,595 2,755 2,969 5% 13% EBITDA margin (%) 17% 18% 18% 15% 15% 1% 2% Net Profit 1,868 2,192 2,362 1,647 1,79 13% 22% Source: Deutsche Bank estimates Felda Global Ventures: Acquiring for growth We have kept FGV s FY13E unchanged and have raised our FY14-15 earnings estimates by 15% and 12%, respectively, taking into account our new CPO price estimates and slight improvements in margins on improved efficiencies. Over the past two months, FGV had announced a series of corporate exercises, most notable were: 1) the RM2.2bn acquisition of 51% stake in Felda Holdings Berhad (FHB) from Koperasi Permodalan Felda (KPF) and 2) RM1.2bn acquisition of Pontian Untied Plantation. We see the move to acquire the 51% stake in FHB as positive as it would allow FGV to consolidate its downstream milling earnings and provide better earnings transparency. The company has one of the highest earnings sensitivities to CPO price changes and we expect its upstream operations to account for c. 75% of operating profits in FY14E. We have rolled our earnings forward to FY14E and value FGV s RM4.8 price target based on 18x one-year forward PER valuations, a 1% discount to the larger market cap Malaysian plantation companies due to its less favorable tree age profile (c. 49% of FGV s palm trees are above 21 years old, this compares to KLK s 12% and IOI s 14%) and slower production growth. We upgrade FGV to Buy from Sell. Downside risks for FGV include overpaying for its acquisitions for growth, a bear market in palm oil and large increases in plantation-related costs such as labor and fertilizer costs. Figure 32: FGV changes in our earnings estimates FYE Dec New Old Change (%) RMm 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 13,84 15,662 16,835 13,84 14,885 16,113-5% 4% EBITDA 1,54 1,94 2,91 1,54 1,714 1,88-13% 11% EBITDA margin (%) 11% 13% 13% 11% 12% 12% - 1% 1% Net Profit , % 12% Source: Deutsche Bank estimates Page 16

17 15 November 213 London Sumatra: Emerging from a disastrous 213 We have raised our net earnings forecasts by 39-45% to Rp65bn (-46% YoY) in 213, Rp1.16tr (+91% YoY) in 214, and Rp1.23tr (+6% YoY) in 215. Our earnings upgrade for this year can be attributed to FX gain from its cash holding following the strengthening of the US dollar, especially in 3Q13. Meanwhile, the big jump in 214E and 215E earnings are mainly contributed by our higher CPO price assumption: RM2,3/ton in 213F (no change), RM2,8/ton in 214F (+8%), RM2,9/ton in 215F (+7%), and RM3,/ton in 216F (+11%). Finally, we have also decreased the total cost/ton in F due to expectation of lower fertilizer cost. Overall, we now have a Buy rating on the stock to reflect higher CPO price going forward, and also slight production recovery. Indeed we believe the market has taken into account the company's poor operating performance this year since the stock is still down by 24% YTD (underperformed the IDX by almost 3%), and this is despite having rebounded by 5% in the past three months following the strengthening of the US dollar. Finally, we see potentially larger upside through re-rating in the event that the company can come up with higher-than-expected production recovery; not to mention also that the stock is two times more liquid than peers, such as Astra Agro. Any key risks will come from further decline in production yield, which has disappointed for two years in a row. Note that our target price is based on 11.5x earnings in 214F, still below the historical average and at a discount to its peers due to the company's poor operating performance in the past two years. Figure 33: LSIP changes in our earnings estimates FYE Dec New Old Change (%) Rp bn 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 3,962 4,998 5,275 3,986 4,71 5,19-1% 6% 3% EBITDA 935 1,667 1, ,185 1,274 21% 41% 37% EBITDA margin (%) 24% 33% 33% 19% 25% 25% 4% 8% 8% Net Profit 65 1,157 1, % 45% 42% Source: Deutsche Bank estimates Astro Agro: Downstream expansion risks and not a beneficiary of stronger USD We keep our net earnings forecast roughly unchanged at Rp1.5tr (-39% YoY) in 213, but also raise it by 36% to Rp2.64tr (+81% YoY) in 214F, and by 27% to Rp2.82tr (+7% YoY) in 215F. Although we have taken into account the stronger US dollar, this has been offset by FX loss amid US dollar debt and thus explains our roughly unchanged earnings for this year. Meanwhile, the big increase in 214E and 215E earnings were also mainly driven by our higher CPO price assumption: RM2,3/ton in 213F (no change), RM2,8/ton in 214F (+8%), RM2,9/ton in 215F (+7%), and RM3,/ton in 216F (+11%). Nonetheless, these were slightly offset by higher production cost/ton caused by a rise in raw material costs (higher palm oil price) since the company buys a lot of plasma and third-party purchases to utilize its new CPO mills. Overall, we also have a Buy rating on this stock and this is predicated upon a higher CPO price going forward. The stock has so far held up well since it rebounded by 37% in the past three months, and is now up by 6% YTD (roughly at par with the IDX). This is not surprising as the company has one of Page 17

18 15 November 213 the highest production yields in Indonesia among peers, and we consider the stock to be a comparatively safer investment given its good track record. Note that our target price is based on 14x earnings in 214E, which is roughly in line with the historical average. Figure 34: AALI changes in our earnings estimates FYE Dec New Old Change (%) Rp bn 213E 214E 215E 213E 214E 215E 213E 214E 215E Sales 11,542 14,817 15,814 11,248 12,861 13,432 3% 15% 18% EBITDA 3,51 4,859 5,23 2,928 3,571 3,976 4% 36% 31% EBITDA margin (%) 26% 33% 33% 26% 28% 3% % 5% 3% Net Profit 1,461 2,643 2,817 1,493 1,936 2,221-2% 36% 27% Source: Deutsche Bank estimates Page 18

19 Page 19 Figure 35: Peer valuation sheet DB Plantation Sector Valuations Company BBG Rec Price TP M Cap ADTV FYE Cal PE (x) EPS growth (%) P/BV (x) Div Yield (%) ROE (%) Shr px perf (%) 14-Nov-13 Code (LC) (LC) (US$m) (US$m) 12 13F 14F 12 13F 14F 12 13F 14F 12 13F 14F 12 13F 14F 1w 1m 3m 6m 1y YTD Malaysia Sime Darby Bhd SIME MK Buy , / IOI Corp IOI MK Buy , / Kuala Lumpur Kepong KLK MK Buy , / Felda Global Ventures FGV MK Buy , / Genting Plantations* GENP MK NR , / Kulim* KUL MK NR , / United Plantations* UPL MK NR , / Sarawak Oil Palms* SOP MK NR / IJM Plantations* IJMP MK NR / TSH Resources* TSH MK NR / Malaysia average Singapore Wilmar International WIL SP Buy , / Golden Agri-Resources GGR SP Buy , / First Resources* FR SP NR , / Indofood Agri* IFAR SP NR.9-1, / Bumitama Agri* BAL SP NR.99-1, / Mewah International* MII SP NR / Singapore average Indonesia Astra Agro Lestari AALI IJ Buy ,3 2, / Salim Ivomas* SIMP IJ NR 82-1, / London Sumatra LSIP IJ Buy 182 2,3 1, / Sampoerna Agro* SGRO IJ NR / BW Plantation* BWPT IJ NR / Indonesia average UK-listed New Britain Palm Oil NBPO LN Buy , / Asia average Source: Deutsche Bank, Bloomberg Finance LP. Note: *denotes Bloomberg consensus estimates, rest covered by DB. All valuation metrics are calendarized and CY12 PER, PBR and DY% all based on average share price in 212. Averages are market cap weighted. 14-Nov November 213