Asia Palm Oil Sector

Transcription

1 Asia Pacific/Indonesia&Malaysia&Singapore Equity Research Agricultural Products & Agribusiness (Agriculture MY (Asia)/Agriculture SG (Asia)) Research Analysts Tan Ting Min tingmin.tan@credit-suisse.com Priscilla Tjitra priscilla.tjitra@credit-suisse.com Amanda Foo Research Assistant Asia Palm Oil Sector SECTOR REVIEW The El Nino wild card Figure 1: Palm oil prices usually continue rallying even after an El Niño (El Niño events are highlighted in orange) 1800 USD / tonne CPO Soyabean Oil Source: Oil World, NOAA, Credit Suisse estimates El Niño has arrived and is strengthening, potentially lasting through An El Niño episode is usually followed by an increase in palm oil prices. The severity of the El Niño is the billion-dollar question, but predictability is less reliable during this time of the year, and therefore, it is still too early to call. Both NOAA and BoM are predicting a moderate El Niño. If it is a weak El Niño, there will be minimal impact to yields. If it is a moderate or strong El Niño, it will likely be positive for palm oil prices. Impact of an El Niño on palm oil and stock prices. Analysing the past six El Niño events, our conclusions are: (1) Palm oil prices appear to continue rallying after El Niño. (2) Palm oil prices rose between 7% and 125%, depending very much on the severity of the El Niño. In the strong El Niño, palm oil spiked 125%, but the mild El Niño could only trigger a 7% move. The moderate El Niños resulted in palm oil prices rising 28-35%. (3) The plantation sector outperformed by 6-25% during El Niño events. All plantation companies are leveraged to an El Niño; the Indonesian plantation companies tend to be purer upstream plays (e.g.,,, FR,,,, ). Our top picks are, FR, and. What if? Assuming a moderate El Niño, and a 28-35% increase in palm oil prices, palm oil prices could go up to RM2,680-2,840 per tonne, suggesting a 12-month average of RM2,400-2,500/t. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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.

2 Focus charts Figure 2: The El Niño (moderate) showed that the plantation sector outperformed by 23%, alongside a 29% increase in palm oil prices 1,800 25% 1,700 20% 1,600 1,500 15% 1,400 10% 1,300 1,200 5% 1,100 0% 1, Feb % % Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Figure 3: The strong El Niño showed that the plantation sector outperformed by 22%, alongside a 125% increase in palm oil prices 3,000 35% 2,500 30% 25% 2,000 20% 1,500 15% 1,000 10% 500 5% 0 0% Jan-97 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 CPO Price KLPLN Rel Perf CPO Price KLPLN Rel Perf Source: Bloomberg, Credit Suisse estimates, NOAA Source: Bloomberg, Credit Suisse estimates, NOAA Figure 4: Profit enhancement for every RM100 per tonne increase in palm oil price (RM2,500-3,000 range) 25% 20% 15% 10% 5% 0% 23% 17% 17% 14% 14% 12% 12% 11% 9% 9% 9% 8% 7% 5% 4% 2% FR Source: CS estimates Figure 5: CY16 P/E estimates, assuming palm oil price of RM2,400/t Mkt Weighted Average = 17.1x FR BPLANT Source: Bloomberg, CS estimates Figure 6: Stock beta to the local indices Figure 7: Stock beta to palm oil prices BPLANT FRLD BPLANT FRLD Source: Bloomberg Source: Bloomberg Asia Palm Oil Sector 2

3 The El Niño wild card El Niño has arrived Both the National Oceanic and Atmospheric Administration in the US (NOAA) and the Bureau of Meteorology in Australia (BoM) have confirmed the onset of an El Niño. The El Niño is strengthening and could potentially last through The severity of the El Niño is the big billion-dollar question, but its predictability is less reliable during this time of the year, and therefore, it is still too early to call. Both NOAA and BoM are predicting that the El Niño will be moderate. El Niño has arrived The severity is the big question If it is a weak El Niño, there will be minimal impact to yields. If it is a moderate El Niño, it could be a positive for palm oil prices. If it is a strong El Niño, then there is a strong case for a significant pick-up in palm oil prices, as the trees will very likely get stressed from severe droughts. Palm oil yields in Malaysia were adversely affected during the El Niño, due to severe droughts, but the impact on yields usually shows up 6-12 months later. An El Niño episode is usually followed by an increase in palm oil prices. In a strong El Niño, the spike in palm oil prices more than makes up for the drop in yields. The impact of El Niño We have used the last six El Niño events to determine how palm oil and plantation stock share prices react. However, one must keep in mind that there are many moving parts in the world of edible oils and, therefore, there will be more than one variable at play at any one time. Our conclusions are: In four out of the last six El Niños, palm oil prices appear to continue to rally (or have a second rally) even after El Niño has ended. This makes sense because palm oil yields are only adversely affected some six to twelve months after an El Niño. In a moderate/strong El Niño, the spike in palm oil prices more than makes up for the drop in yields Historical El Niños result in palm oil prices rising 7%- 125% depending on severity During the last six El Niños, palm oil prices rose between 7% and 125% a wide range depending very much on the severity of the El Niño. In the El Niño, palm oil prices spiked 125%, but the mild El Niño could only trigger a 7% move. The moderate El Niños resulted in palm oil prices rising 28-35%. During the last six El Niños, the plantation sector outperformed by 6-25%. In the strong El Niño, the plantation sector outperformed by 22% but the mild El Niño could only trigger a 6% move. The moderate El Niños resulted in the plantation sector outperforming by 9-25%. Profit leverage We are currently assuming palm oil prices of RM2,250/tonne in 2015 and RM2,400/t in We are comfortable with our palm oil forecasts for now but there could be significant upside to our palm oil price assumption in 2016 should a strong El Niño hit. The Indonesian plantation companies are most leveraged to rising palm oil price, as they are purer upstream players. Our top picks are, FR and (listed in Singapore) and (listed in Malaysia) What if? Assuming a moderate El Niño, and a 28-35% increase in palm oil prices, palm oil prices could go up to RM2,680-2,840/t, suggesting a 12-month average of RM2,400-2,500/t. The plantation sector outperformed 6-25% We are now assuming a palm oil price average of RM2,400/t in 2016 but there could be significant upside if it is a strong El Niño Asia Palm Oil Sector 3

4 Sector valuations Figure 8: Valuation comparison (calendarised) Mkt Daily Price Target Upside cap value P/E (x) EV/EBITDA (x) Ticker Calendarised LC (5 Jun) Rating price (%) (US$ bn) (US$ mn) E 16E E 16E MK Sime Darby RM 8.61 N % MK Corp RM 4.05 U % MK RM N % MK Genting Plant RM O % MK Felda GV RM 1.92 N % BPLANT MK Boustead Plant RM 1.33 N % Malaysia SP Wilmar SGD 3.33 O % SP Golden Agri SGD 0.42 N % FR SP First Resources SGD 2.03 O % SP Bumitama SGD 1.01 O % SP Indofood Agri SGD 0.74 U % Singapore IJ Astra Agro IDR 24,600 N 21,000-15% IJ BW Plantations IDR 413 N % IJ London Sumatra IDR 1,740 N 1,600-8% IJ Salim Ivomas IDR 660 N 630-5% IJ Dharma Satya IDR 4,100 N 4,500 10% IJ Sampoerna Agro IDR 1,800 U 1,500-17% Indonesia Region Source: Company data, Credit Suisse estimates Asia Palm Oil Sector 4

5 El Niño has arrived Both the National Oceanic and Atmospheric Administration in the US (NOAA) and the Bureau of Meteorology in Australia (BoM) have confirmed the onset of an El Niño. BoM says El Niño has strengthened In its most recent report on 26 May 2015, the BoM stated, The El Niño continues to strengthen. International climate models surveyed by the Bureau indicate sea surface temperatures will remain well above El Niño thresholds at least into the southern hemisphere spring. Oceanic and atmospheric indicators show a clear El Niño signal. The market is especially excited because BoM added, "The average of the model forecasts for NIÑO3.4 for October 2015 is +2.4 C. A monthly value of NIÑO3.4 this high has only been observed a few times since records began in 1980 (35 years); during the and El Niño events." BoM says El Niño has strengthened Figure 9: Average of international model outlooks for NIÑO3.4 Source: Australia s BoM Figure 10: El Niño forecasts for June 2015 Figure 11: El Niño forecasts for August 2015 Source: Australia s BoM Source: Australia s BoM Asia Palm Oil Sector 5

6 Figure 12: El Niño forecasts for October 2015 Figure 13: El Niño conditions Source: Australia s BoM Source: Australia s BoM Figure 14: Most models are predicting a moderate El Niño but there are some that are forecasting a strong El Niño Note: Above 2 on Y-axis denotes a strong El Niño Source: IRI for Climate & Society (updated 19-May-2015) NOAA says high chance of El Niño lasting through 2015 The NOAA reported on 14 May 2015, "There is an approximately 90% chance that El Niño will continue through Northern Hemisphere summer 2015, and a greater than 80% chance it will last through However, model forecast reliability tends to be lower during the N. Hemisphere spring, which somewhat limits confidence in these forecasts. Therefore, there remains considerable uncertainty about how strong this event may become." Further updates on El Niño will be released on the following dates: 9 June 2015 (BoM) NOAA says El Niño could last through 2015 More updates on 9, 18 and 19 June 18 June 2015 (NOAA) 19 June 2015 (BoM) Asia Palm Oil Sector 6

7 The severity of El Niño is the billion-dollar question The severity of the El Niño is the big billion-dollar question, but its predictability is less reliable during this time of the year, and therefore it is still too early to tell. Both NOAA and BoM are predicting that the El Niño will be moderate. Impact on palm oil prices depends on the severity If it is a weak El Niño, there will be minimal impact to yields. If it is a moderate El Niño, it could be a positive for palm oil prices. If it is a strong El Niño, then there is a strong case for a significant pick-up in palm oil prices, as the trees will very likely get stressed from severe droughts. Palm oil yields in Malaysia were adversely affected during the El Niño, due to severe droughts, A report for the United Nations on the impact of El Niño concluded that the most severe El Niño ( ) saw the highest yield loss of 17%. In the forecasts for the plantation companies under our coverage, we have assumed a palm oil price of about RM2,250/t in 2015 and RM2,400/t in Our 2016 forecasts may be too conservative if a strong El Niño hits hard. Why the reluctance? Once bitten, twice shy While we would very much like to be bullish on palm oil prices (we are brokers after all), the weather is just too hard to predict. I would like to remind readers about the February 2014 incident where reports were circulating about a severe El Niño, which fizzled out and never materialised. Once bitten twice shy? False alarm early 2014 Palm oil prices fell 52% from peak (March) to trough (September) in 2014 after the false alarm, and the Malaysian KL Plantation Index underperformed the KLCI by 7% in So far, so good on the ground We spoke to the plantation companies who have indicated that some of the plantations have seen some dryness but nothing too alarming, and that the situation is manageable. Interestingly, rainfall data from Bloomberg, sourced on the largest palm acreage states in Malaysia and Indonesia suggests that there is dryness in Sabah, Johor and Pahang in Malaysia. Meanwhile, rainfall in Sarawak in East Malaysia, and Kalimantan and Sumatra in Indonesia looks in line with expectations. Figure 15: Rainfall in Sabah in 2015 has been below the range Figure 16: Rainfall in Sarawak in 2015 has been in line with expectations Range Range Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015-Sabah 2015-Sarawak Source: Bloomberg Source: Bloomberg Asia Palm Oil Sector 7

8 Figure 17: Rainfall in Johor in 2015 has been below the range Range Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015-Johor Source: Bloomberg Figure 19: Rainfall in North Sumatra in 2015 is within the normal range 0.70 Figure 18: Rainfall in Pahang in 2015 has been below the range Range Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015-Pahang Source: Bloomberg Figure 20: Rainfall in East Kalimantan in 2015 is within the normal range Range Range Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015-Sumatra 2015-Kalimantan Source: Bloomberg What is El Niño? Source: Bloomberg (Main source: National Oceanic and Atmospheric Association (NOAA)) El Niño is the occurrence of an unusually warm Pacific Ocean climate cycle that can be traced back to thousands of years ago. The first signs of an El Niño are often seen in the abnormal warming of the sea surface temperature in the Equatorial Pacific Ocean, something that has begun to occur. This sea surface temperature anomaly results in an increase of rising warm air. As the wind from the Western Pacific Ocean blows strongly to the east, the pool of warm water is pushed eastward, subsequently blocking the rising cold water. If El Niño develops, one can expect warmer and drier conditions in Southeast Asia, India, Australia and North America, and conversely, cooler and damper conditions in South America. El Niño causes dry conditions in Southeast Asia, India, Australia and North America With annual oilseed crops (such as soy, rapeseed and sunflower) being more susceptible to weather changes than a hardy palm tree, palm oil companies stand to benefit the most from an El Niño experiencing only a marginal drop in production output while riding the wave of a price spike. Asia Palm Oil Sector 8

9 Figure 21: Running three-month Mean Oceanic Niño Index values Aug-80 Dec-81 Apr-83 Aug-84 Dec-85 Apr-87 Aug-88 Dec-89 Apr-91 Aug-92 Dec-93 Apr-95 Aug-96 Dec-97 Apr-99 Aug-00 Dec-01 Apr-03 Aug-04 Dec-05 Apr-07 Aug-08 Dec-09 Apr-11 Aug-12 Dec-13 Apr-15 Note: Weak: SST anomaly, Moderate: , Strong: , Very strong: 2.0 and above Source: Climate Prediction Centre How often does El Niño occur? El Niño occurs irregularly, about once every two to seven years, and typically lasts for 12 to 18 months. However, recent El Niños have occurred a little more frequently. It is a plausible hypothesis that global warming may be affecting El Niño, as both phenomena involve large changes in the earth s heat balance. El Niño, known as The Little Boy or Christ child in Spanish, earned its name due to its tendency to arrive around Christmas. In short, El Niño usually peaks near Christmas. El Niño hits every two to seven years El Niño usually peaks near Christmas The , El Niño was the most severe in the last century, hitting a +2.4 ONI value at its peak as recorded by the National Weather Service. While El Niño events of and were considered mild, crop development was still disrupted in some parts of the world. El Niño is usually followed by a La Nina. Figure 22: Historical El Niños Time Duration (months) Intensity Lag time Jun 1982-Jul Very strong Sep 1986-Mar Moderate to strong 3 years Jun 1991-Jul Moderate 3.25 years Oct 1994-Apr Moderate 2.25 years Jun 1997-May Very strong 2.25 years Jun 2002-Mar Moderate 4 years Aug 2004-Feb Weak 1.5 years Oct 2006-Feb Weak 1.5 years Aug 2009-May Moderate 2.75 years Nov 2014-present Weak 4.5 years Source: NOAA, Credit Suisse estimates Where does El Nino hit? (Main source: Royal Netherlands Meteorological Institute) El Niño affects the weather in large parts of the world. The effects depend strongly on the location and the season. The strongest effects on precipitation are in Southeast Asia and the western Pacific Ocean, especially in the dry season (August-November). The number Asia Palm Oil Sector 9

10 of tropical cyclones also depends on El Niño in most basins. In boreal winter the effects are most widespread from southern Africa to eastern Russia and most of the Americas. Mar-May: The strongest effects are in the western Pacific Ocean: along the equator, rainfall increases during El Niño but at North and South, rainfall decreases. The north of Mexico and the desert states of the US usually get more rain. The northeast of Brazil often stays drier than usual. Europe rains more on average. Jun-Aug: Eastern Indonesia often suffers droughts during El Niño. The rain zone has moved east to the islands along the equator in the Pacific Ocean. The Indian monsoon is often weaker during El Niño, although by no means always. Sep-Nov: The effects of El Niño are strongest during this period. Almost all of Indonesia, the Philippines and eastern Australia are drier than usual during most El Niño events. Large parts of India are often drier than usual, but Sri Lanka and some southern states get more rain. East Africa, parts of Central Asia and Spain are also on average wetter than normal during El Niño, as are Chile and Uruguay. Dec-Feb: The Philippines and East Indonesia stay drier, whereas the Pacific islands along the equator remain wetter. Florida also gets more rain than normal during El Niño, this effect extends to other southern states of the US and into Mexico. South Africa is more frequently dry, as is the northern coast of South America and some of the leeward Antilles. In Uruguay and South Brazil, rainfall increases. Along the coasts of Ecuador and Peru, rainfall increases when the coastal waters heat up. Figure 23: Precipitation during the September-November period, where the effects of El Niño are the strongest Note: Blue circles indicate that during El Niño there was, on average, more rain than normal, red circles indicate drought during El Niño. Source: Royal Netherlands Meteorological Institute. Asia Palm Oil Sector 10

11 Figure 24: Precipitation during the December-February period Note: Blue circles indicate that during El Niño there was, on average, more rain than normal, red circles indicate drought during El Niño. Source: Royal Netherlands Meteorological Institute Palm oil prices historically increase during El Niño An El Niño episode is usually followed by an increase in palm oil prices. Figure 23 shows the impact of El Niño (shaded in orange) on commodity prices. Palm oil and soy oil prices reacted very strongly to El Niño, especially in 1998 when El Niño was severe. The El Niño was so mild that it did not have much of an effect on palm oil prices. El Niño is usually followed by an increase in palm oil prices Figure 25: Palm oil prices usually continues rallying even after an El Niño (El Niño events are highlighted in orange) USD / tonne CPO Soyabean Oil Price rally after weak El Nino was primarily due to EU s biodiesel policy implementation. Source: Oil World, NOAA, Credit Suisse estimates Asia Palm Oil Sector 11

12 Spike in palm oil prices makes up for drop in output A drop in palm oil production is usually more than made up for by a significant spike in palm oil prices. Hence, El Niño has historically been a windfall for plantation companies. During the El Niño, palm oil prices peaked at about RM2,500/tonne. In the El Niño, palm oil prices peaked at RM2,100/tonne. And during the El Niño, palm oil prices spiked up to RM4,400/tonne, boosted by other factors apart from El Niño (such as bio-diesel and crude oil prices). Drop in output is more than made up for by a significant spike in palm oil prices Figure 26: The drop in FFB yields usually happen after an El Niño event (RM/T) 4,500 YoY FFB yield Δ CPO Price 4,000 3,500 3,000 2,500 2,000 1,500 1, (T/ha) Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: MPOB, Credit Suisse estimates -0.6 Figure 27: Wheat production in Australia was negatively impacted during El Niño events Source: ABARES (Australia s Department of Agriculture) Asia Palm Oil Sector 12

13 The impact of El Niño We have used the last six El Niño events to determine how palm oil and plantation stock share prices react. However, one must keep in mind that there are many moving parts in the world of edible oils and, therefore, there will be more than one variable at play at any one time. Figure 28: How does El Niño impact palm oil prices and plantation index performances? El Niño CPO price RM/tonne KLPLN CPO trough 1,159 KLPLN trough 9% STRONG CPO peak 2,604 KLPLN peak 31% Δ 125% Δ 22% CPO trough KLPLN trough -3.6% MODERATE CPO peak KLPLN peak 21.7% Δ 35% Δ 25% CPO trough 1,315 KLPLN trough -1% MODERATE CPO peak 1,701 KLPLN peak 22% Δ 29% Δ 23% CPO trough 2,089 KLPLN trough -8% MODERATE CPO peak 2,682 KLPLN peak 1% Δ 28% Δ 9% CPO trough 1,481 KLPLN trough -1% WEAK CPO peak 1,583 KLPLN peak 5% Δ 7% Δ 6% CPO trough 1,516 KLPLN trough 5% WEAK CPO peak 2,000 KLPLN peak 28% Source: NOAA, MPOB, Bloomberg, Credit Suisse research Our conclusions are as follows: Δ 32% Δ 23% In four out of the last six El Niños, palm oil prices appear to continue rallying (or have a second rally) even after El Niño has ended. This makes sense because palm oil yields are only adversely affected some six to twelve months after an El Niño. Many moving parts in play, besides El Niño Historical El Niños result in palm oil prices rising 7-125% depending on severity During the last six El Niños, palm oil prices rose between 7% and 125%, a wide range depending very much on the severity of the El Niño. In the El Niño, palm oil spiked 125%, but the mild El Niño could only trigger a 7% move. The moderate El Niños resulted in palm oil prices rising 28-35%. During the last six El Niños, the plantation sector outperformed by 6-25%. In the strong El Niño, the plantation sector outperformed by 22% but the mild El Niño could only trigger a 6% move. The moderate El Niños resulted in the plantation sector outperforming by 9-25%. We suggest that investors are mindful that plantation stocks rallied significantly even during the weak El Niño primarily because of the implementation of biodiesel policies in the EU, less so due to the El Niño impact. The plantation sector outperformed 6-25% Asia Palm Oil Sector 13

14 Figure 29: The El Niño was the most severe of the 20 th century 3,000 2,500 2,000 1,500 1, Jan-97 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 35% 30% 25% 20% 15% 10% 5% 0% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Figure 30: The El Niño (moderate El Niño) 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1, Feb % 20% 15% 10% 5% 0% -5% 800 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03-10% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Figure 31: The El Niño (moderate El Niño) 4,000 4% 3,500 0% 3, Jul % 2,500-8% 2,000-12% 1,500 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10-16% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Asia Palm Oil Sector 14

15 Figure 32: The El Niño (moderate El Niño) 2,000 1,800 1,600 1,400 1,200 1, Jun Apr-94 Jun-94 Aug-94 Oct-94 Dec-94 Feb-95 Apr-95 Jun-95 Aug-95 Oct-95 24% 20% 16% 12% 8% 4% 0% -4% -8% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Figure 33: The El Niño (weak El Niño) 2,200 15% 2,000 1,800 10% 5% 1,600 1,400 1, Jun % -5% 1,000 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05-10% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Figure 34: The El Niño (weak El Niño) 3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1, Jun % 60% 50% 40% 30% 20% 10% 1,000 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 0% CPO Price KLPLN Rel Perf Source: Bloomberg, NOAA, Credit Suisse research Asia Palm Oil Sector 15

16 Profit leverage We are currently assuming palm oil prices of RM2,250/tonne in 2015 and RM2,400 in We are comfortable with our palm oil forecasts for now but there could be upside to our palm oil price assumption in 2016 should a strong El Niño hit. What if? Assuming a moderate El Niño hits, and there is a 28-35% increase in palm oil prices (based on history), palm oil prices could go up to RM2,680-2,840/t. If so, palm oil prices could average RM2,400-2,500/t over a 12-month period. We are now assuming a palm oil price of RM2,400 for 2016, but more upside if a strong El Niño hits Figure 35: Valuation comparison (calendarised) Mkt Daily Price Target Upside cap value P/E (x) EV/EBITDA (x) Ticker Calendarised LC (5 Jun) Rating price (%) (US$ bn) (US$ mn) E 16E E 16E MK Sime Darby RM 8.61 N % MK Corp RM 4.05 U % MK RM N % MK Genting Plant RM O % MK Felda GV RM 1.92 N % BPLANT MK Boustead Plant RM 1.33 N % Malaysia SP Wilmar SGD 3.33 O % SP Golden Agri SGD 0.42 N % FR SP First Resources SGD 2.03 O % SP Bumitama SGD 1.01 O % SP Indofood Agri SGD 0.74 U % Singapore IJ Astra Agro IDR 24,600 N 21,000-15% IJ BW Plantations IDR 413 N % IJ London Sumatra IDR 1,740 N 1,600-8% IJ Salim Ivomas IDR 660 N 630-5% IJ Dharma Satya IDR 4,100 N 4,500 10% IJ Sampoerna Agro IDR 1,800 U 1,500-17% Indonesia Region Source: Company data, Credit Suisse estimates Figure 36: Plantation companies CY15 P/E Mkt Weighted Average = 22.3x 10 0 FR BPLANT Source: Bloomberg, Credit Suisse estimates Asia Palm Oil Sector 16

17 Figure 37: Plantation companies CY16 P/E Mkt Weighted Average = 17.1x FR BPLANT Source: Bloomberg, Credit Suisse estimates Figure 38: P/E valuations, assuming palm oil price of RM2,500 in FY FR Source: Bloomberg, Credit Suisse estimate Figure 39: P/E valuations, assuming palm oil price of RM2,500 in FY FR Source: Bloomberg, Credit Suisse estimate Asia Palm Oil Sector 17

18 Figure 40: P/E valuations, assuming palm oil price of RM3,000 in FY FR Source: Bloomberg, Credit Suisse estimate Figure 41: P/E valuations, assuming palm oil price of RM3,000 in FY FR Source: Bloomberg, Credit Suisse estimate Figure 42: Profit leverage for every RM100 per tonne increase in palm oil prices (RM2,000-2,500 range) 160% 140% 120% 111% 121% 137% 100% 80% 78% 60% 40% 20% 0% 2% 7% 8% 12% 14% 16% 16% 17% 23% 32% 42% FR Source: Bloomberg, Credit Suisse estimate Asia Palm Oil Sector 18

19 Figure 42: Profit leverage for every RM100 per tonne increase in palm oil prices (RM2,500-3,000 range) 25% 23% 20% 17% 17% 15% 10% 5% 4% 5% 7% 8% 9% 9% 9% 11% 12% 12% 14% 14% 2% 0% FR Source: Bloomberg, Credit Suisse estimate Figure 43: EBIT breakdown for % 80% 60% 40% 20% 0% -20% Wilmar Sime Darby Corp epong Astra Agro Bumitama London Sumatra First Resources Genting Plantations Indofood Agri Sampoerna Agro United Plantations Felda Golden Agri IJM Plantations Upstream Downstream Others Source: Company data, Credit Suisse estimates Profit sensitivity Figure 44: Sime Darby profit sensitivities Year-end 30 Jun FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (RM mn) 1,033 1,092 1,766 1,990 2,500 2,885 3,042 3,574 EPS (sen) P/E RM Figure 45: Corp. profit sensitivities Year-end 30 Jun FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (RM mn) ,179 1,304 1,478 1,625 EPS (sen) P/E RM Asia Palm Oil Sector 19

20 Figure 46: KL Kepong profit sensitivities Year-end 30 Sep FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (RM mn) ,077 1,129 1,429 1,500 EPS (sen) P/E RM Figure 47: Genting Plantations profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (RM mn) EPS (sen) P/E RM Figure 48: Felda GV profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (RM mn) EPS (sen) P/E RM Figure 49: Wilmar profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (US$ mn) 1,005 1,158 1,122 1,270 1,239 1,382 1,356 1,494 EPS (S$ cents) P/E S$ Figure 50: Golden Agri profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (US$ mn) EPS (S$ cents) (1.6) (1.0) P/E S$ Figure 51: First Resources profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (US$ mn) EPS (S$ cents) P/E S$ Figure 52: Bumitama profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,002 1,405 1,578 1,935 2,155 EPS (S$ cents) P/E S$ Asia Palm Oil Sector 20

21 Figure 53: Indofood Agri profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,352 1,450 EPS (Rp) (135) (190) ,002 P/E S$ Figure 54: Astra Agro profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,077 1,201 2,319 2,378 3,560 3,555 EPS (Rp) (104) ,473 1,510 2,261 2,258 P/E Rp24, , Figure 55: BW Plantation profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) EPS (Rp) (15) (14) (1) P/E Rp Figure 56: London Sumatra profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,252 1,220 EPS (Rp) P/E Rp1, Figure 57: Salim Ivomas profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,710 1,790 EPS (Rp) (43) (48) P/E Rp Figure 58:Dharma Satya Nusantara profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) ,150 1,296 EPS (Rp) (114) (72) P/E Rp4, Figure 59: Sampoerna Agro profit sensitivities Year-end 31 Dec FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Net profit (Rp bn) EPS (Rp) (128) (147) P/E Rp1, Asia Palm Oil Sector 21

22 Figure 60: Relative performance of plantation stocks in 1Q15 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% FRLD BPLANT Source: Reuters Figure 61: Relative performance from 1 April 2015 to date 25% 20% 15% 10% 5% 0% -5% -10% FRLD BPLANT Source: Reuters Figure 62: Stock beta to the local indices Figure 63: Stock beta to palm oil prices BPLANT FRLD BPLANT FRLD Source: Bloomberg Our top picks Source: Bloomberg All upstream plantation companies are leveraged to an El Niño; the Indonesian plantation companies tend to be purer upstream plays. Those with high profit and beta leverages, include,, FR,,, and. Our top picks are, FR, and. Asia Palm Oil Sector 22

23 Appendix 1 Fundamentally bearish in the short term In our latest palm oil report (dated 8 May 2015), we highlighted the short-term bearish factors surrounding the palm oil sector. Nevertheless, downside is limited as the post-gfc low for palm oil price is RM1,900 per tonne. Why the pessimism? (1) Low crude oil price makes biodiesel commercially unviable. (2) US soybean crop will likely be at a record high. (3) India s edible oil inventories are close to a record high. (4) Palm oil is less attractive versus soy oil as the discount has narrowed. Low oil price and an oversupply of edible oils is putting pressure on palm oil prices We called for a more positive stance on palm oil prices in the latter part of (1) Crude oil prices should have troughed by year-end. (2) Indonesia s biodiesel policy is key, as full implementation will boost palm oil demand but we worry about execution. (3) Palm oil inventories in China are at a record low. (4) Fertiliser costs remain subdued. (5) The weather experts have declared an El Niño. This has become the wild card! Asia Palm Oil Sector 23

24 Companies Mentioned (Price as of 05-Jun-2015) Boustead Plantation (BOPL.KL, RM1.33) Bumitama Agri Limited (BUMI.SI, S$1.01, OUTPERFORM, TP S$1.2) Dharma Satya Nusantara (.JK, Rp4,100) Eagle High Plantations (.JK, Rp413) Felda Global Ventures (H.KL, RM1.92) First Resources Ltd (FRLD.SI, S$2.03, OUTPERFORM, TP S$2.3) Genting Plantations Bhd (.KL, RM10.26, OUTPERFORM, TP RM11.2) Golden Agri-Resources (GAGR.SI, S$0.42) Corporation (B.KL, RM4.05) Indofood Agri Resources Ltd (.SI, S$0.74) Kuala Lumpur Kepong (K.KL, RM22.5) PT Astra Agro Lestari Tbk (.JK, Rp24,600) PT London Sumatra Indonesia (.JK, Rp1,740) Salim Ivomas Pratama (.JK, Rp660) Sampoerna Agro Tbk (.JK, Rp1,800) Sime Darby (.KL, RM8.61) Wilmar International Ltd (WLIL.SI, S$3.33, OUTPERFORM, TP S$3.74) Disclosure Appendix Important Global Disclosures Tan Ting Min and Priscilla Tjitra, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Bumitama Agri Limited (BUMI.SI) BUMI.SI Closing Price Target Price Date (S$) (S$) Rating 02-Aug N * 27-Feb May Jul * 03-Mar O 28-Apr Nov Feb May May * Asterisk signifies initiation or assumption of coverage NEUTRAL OUTPERFORM Target Price Closing Price BUMI.SI 1- Jan Jul Jan Jul Jan Year Price and Rating History for First Resources Ltd (FRLD.SI) FRLD.SI Closing Price Target Price Date (S$) (S$) Rating 02-Aug O * 14-Aug Mar May Jul * 19-Aug Nov Feb Apr May Aug Nov May * Asterisk signifies initiation or assumption of coverage OUTPERFORM Target Price Closing Price FRLD.SI 1- Jan Jul Jan Jul Jan- 15 Asia Palm Oil Sector 24

25 3-Year Price and Rating History for Genting Plantations Bhd (.KL).KL Closing Price Target Price Date (RM) (RM) Rating 02-Aug O 28-Aug Nov Feb May N 29-Jul Nov Feb Apr O 10-Nov Feb May * Asterisk signifies initiation or assumption of coverage OUTPERFORM NEUTRAL Target Price Closing Price.KL 1- Jan Jul Jan Jul Jan Year Price and Rating History for Wilmar International Ltd (WLIL.SI) WLIL.SI Closing Price Target Price Date (S$) (S$) Rating 02-Aug N 12-Nov Feb Jul Feb O 27-Apr R 11-Mar O 08-May * Asterisk signifies initiation or assumption of coverage NEUTRAL OUTPERFORM REST RICT ED Target Price Closing Price WLIL.SI 1- Jan Jul Jan Jul Jan- 15 The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Asia Palm Oil Sector 25

26 Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (52% banking clients) Neutral/Hold* 39% (50% banking clients) Underperform/Sell* 16% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Bumitama Agri Limited (BUMI.SI) Method: Our target price of S$1.20 for Bumitama Agri (BUMI.SI) is based on 14.5x 2016E P/E (price/earnings) or a slight discount to the 2016E P/E implied by our target price for First Resources. The similar P/E implied by our target price for BUMI is due to similar young plantation age and also its high growth profile compared to First Resources and a slight discount is due to the lower liquidity of BUMI shares. Risk: The following risks could impede achievement of our S$1.20 target price for BUMI: (1) the company's realised selling prices for CPO are materially different from our estimates; (2) Bumitama's cash flow could be adversely affected by production costs, particularly if FFB purchase prices, fuel and consumable materials costs increase at a significantly different rate than our forecast because of movements in input commodity prices; (3) major changes in government policy and regulation, including taxation, concession terms etc., which could significantly impact Bumitama's cash flow; (4) any significant fluctuation of the Indonesian rupiah against the US dollar and Malaysian Ringgit against the US dollar could have a material impact on revenues and earnings; and (5) a continued surge in CPO prices may also spark further government intervention creating regulatory uncertainties as the government seeks to curb inflation driven by higher cooking oil prices. Price Target: (12 months) for First Resources Ltd (FRLD.SI) Method: Our target price for First Resource (FRLD) of S$2.30/share represents 15x 2016E P/E (price/earnings ratio), at par to the 2016E P/E implied by our target price for Astra Agro (). Risk: The following risks could impede achievement of our S$2.30 target price for FRLD: (1) the company's realised selling prices for CPO are materially different from our estimates; (2) Felda's cash flow could be adversely affected by production costs, particularly if FFB purchase prices, fuel and consumable materials costs increase at a significantly different rate than our forecasts because of movements in input commodity prices; (3) major changes in government policy and regulation, including taxation, concession terms etc., which could significantly impact the company's cash flow; (4) any significant fluctuation of the Indonesian rupiah against the US dollar and Malaysian Ringgit against the US dollar could have a material impact on revenues and earnings; (5) a continued surge in CPO prices may also spark further government intervention creating regulatory uncertainties as the government seeks to curb inflation driven by higher cooking oil price; and (6) significant new supply coming into Indonesian palm oil refineries industry may lower the margin for the company's downstream operation, as the industry may experience structural oversupply. Asia Palm Oil Sector 26

27 Price Target: (12 months) for Wilmar International Ltd (WLIL.SI) Method: The target price of S$3.74 for Wilmar International assumes an average P/E of 13.1x multiplied by its 2015 earnings per share. The average P/E of 13.1x was derived from valuing its China business at a P/E of 11.0x (forward target P/E from the CS team) and its non- China business at a P/E of 14.0x (plantation sector average). Risk: Wilmar's target price of S$3.74 has the following risks and potential upsides: UPSIDE (1) The property foray is not a concern to investors any more. (2) Refining, oilseed crushing and edible oil margins come in higher than expected. (3) The Chinese government does not interfere with Wilmar's edible oil business. (4) A major M&A deal. RISKS: (1) Refining, oilseed crushing and edible oil margins disappoint. (2) Purchases of raw material are timed wrongly. (3) The Chinese government stops Wilmar from increasing selling prices to curb inflation. (4) Possible trading or forex losses. Price Target: (12 months) for Genting Plantations Bhd (.KL) Method: Genting Plantations' target price of RM11.20 assumes a price/earnings (P/E) multiple target of 23x multiplied by the FY15E earnings per share (assuming a palm oil price average of RM2,250 per tonne in 2015). Risk: Upside risks to Genting Plantations' target price of RM11.20 include: (1) palm oil prices spiking significantly; (2) the biotechnology division surprising on the upside; and (3) the entire palm oil sector gets rerated upwards. Downside risks: (1) palm oil prices fall significantly; (2) related party transactions; (3) costs increase significantly; and (4) the biotech division fails to commercialise the R&D in 2013 and beyond. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (.KL, H.KL, GAGR.SI,.JK,.JK,.JK, K.KL,.JK,.JK,.SI, BOPL.KL) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (GAGR.SI,.JK,.JK,.JK,.JK,.SI, BOPL.KL) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (GAGR.SI,.JK, BOPL.KL) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (GAGR.SI,.JK,.JK,.JK,.JK,.SI, BOPL.KL) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BUMI.SI, FRLD.SI,.KL, H.KL, GAGR.SI,.JK,.JK,.JK, K.KL, B.KL,.JK,.JK,.SI, BOPL.KL) within the next 3 months. Credit Suisse may have interest in (BUMI.SI, FRLD.SI,.JK,.JK,.JK,.JK,.JK,.JK,.SI) Credit Suisse may have interest in (.KL,.KL, H.KL, K.KL, B.KL, BOPL.KL) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (.JK). Credit Suisse has a material conflict of interest with the subject company (WLIL.SI). Credit Suisse is acting as financial advisor to Goodman Fielder in relation to the receipt of the announced proposal from Wilmar International Limited and First Pacific Company Limited. For other important disclosures concerning companies featured in this report, including price charts, please visit the website at or call +1 (877) Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BUMI.SI, FRLD.SI, WLIL.SI,.KL,.KL, H.KL, GAGR.SI,.JK,.JK,.JK, K.KL, B.KL,.JK,.JK,.JK,.SI, BOPL.KL) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (GAGR.SI,.JK,.JK, BOPL.KL) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Asia Palm Oil Sector 27