KUCHING: Analysts observed the weak ringgit and possible stronger than expected El Nino could spur crude palm oil (CPO) prices higher.
The research arm of CIMB Investment Bank Bhd (CIMB Research) in a report yesterday said concerns that the ongoing El Nino-induced drought experienced in some of the key palm oil regions in Indonesia have caused CPO futures prices to rise 17 per cent over the past two weeks.
The drought in Indonesia will result in lower output in terms of fresh fruit bunch (FFB) over coming months and also in 2016.
Following surveys with plantation players, CIMB Research said FFB yields achieved in the lower rainfalls areas were below expectations for the month of August and September.
The research firm explained that the lower FFB yields were due to the slower ripening of the FFB, resulted in lower yields.
Similarly, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) yesterday said the latest information by Australia Bureau of Meteorology mentioned that “a strong El Nino” is likely to persist into early 2016.
As a result, the research firm has assumed inventory for palm oil in 2016 to be reduced by 20 per cent to 1.58 million metric tonne (MT). MIDF Research noted the lower inventory is expected to be positive to CPO price.
Additionally, the research firm expects CPO price in the near future to benefit from the weak ringgit trend.
MIDF Research noted fundamentally, weaker ringgit is expected to improve CPO competitiveness against other vegetable oil especially soybean oil.
Hence, the research firm has upgraded its 2016 CPO price forecast to RM2,300 per MT from RM2,100 per MT.
In tandem with the higher CPO price assumption, MIDF Research said it has also increased its financial year 2016 (FY16) earnings projection for planters under its coverage.
The research firm said Felda Global Ventures Holdings Bhd (FGV) has been upgraded to ‘neutral’ recommendation as the company’s outlook should improve in line with better CPO price prospect.
Besides that, MIDF Research said it has also upgraded TSH Resources Bhd (TSH) to a ‘buy’ as its FFB production is expected to grow at 12 per cent in FY16 which meant that the company is poised to enjoy superior earnings growth against other mid-capitalisation peers.
The research firm noted the plantation company’s young age profile estimated at 7.3 years old meant that its FFB production is more resilient to El Nino.
Moreover, MIDF Research is also positive on Sime Darby Bhd (Sime Darby) as its FY16 FFB is expected to grow at 10 per cent year-on-year (y-o-y), the highest among big capitalisation peers.
The research firm believed most of the company’s plantation segment FFB growth is expected to come from New Britain Palm Oil Ltd (NBPOL) which will start its first full year contribution in FY16.
Therefore, both MIDF Research and CIMB Research are positive on the plantation sector going forward.