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Please refer to page 37 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

20 January 2020 ASEAN

EQUITIES

Revision of CPO price forecasts

New

Old

Difference

Annual

(US$)

(RM)

(US$)

(RM)

(US$)

(RM)

2018A

555

2,234

555

2,234

2019A

535

2,217

500

2,070

2020E

750

3,040

610

2,500

23%

22%

2021E

715

2,900

nmf

L-T

680

2,720

675

2,734

-1%

Source: Bloomberg, Macquarie Research, January 2020

Macquarie vs. Consensus

Source: Bloomberg, Macquarie Research, January 2020

ASEAN Plantations coverage

Source: Bloomberg, Macquarie Research, January 2020;

Note: Share prices as at 17 January 2020 close

TP-implied EV/ha for ASEAN Plantations

coverage

Source: Bloomberg, Macquarie Research, January 2020

Analysts

Macquarie Capital Securities (Malaysia) Sdn. Bhd.

Aiman Mohamad +60 3 2059 8986

aiman.mohamad@macquarie.com

PT Macquarie Sekuritas Indonesia

Richard Danusaputra +62 21 2598 8368

richard.danusaputra@macquarie.com

ASEAN Plantations

Positioned for a good year in 2020

Key points

 We think the tightening across the vegetable oil complex will continue for a

second consecutive year in CY20 which could support CPO at current levels

 Revised our CY20E CPO price assumption by +23% to USD750/mt

 Planters with high sensitivity to CPO price and visible operating leverage

are our top picks in the sector – key picks are SDPL MK and LSIP IJ

Prone to headline risks but stronger fundamentals remain intact

• CPO price rebounded strongly in 4Q19 and broke the RM3,000/mt level in

January 2020 after strong data were released by MPOB starting from October

2019. We believe the CPO price will remain elevated at c.RM3,000/mt as

majority of the veg. oil complex tightens for the second consecutive year in

CY20E, particularly CPO and SBO. We revised our CY20E CPO price forecast

to USD750/mt from USD610/mt previously.

• In 1H20 we should see further inventory drop in Malaysia and Indonesia

as we believe demand will exceed supply due to lower production. Festive

season i.e. CNY, Ramadhan and Eid will all happen in 1H20 and therefore

should impact production. Further, due to CPO seasonality, whereby the yields

in 1H are lower than those of 2H, should support the case for further tightening

of CPO stock-to-usage (S/U) ratio. The continued dry weather in Kalimantan,

Indonesia, should also be supportive of CPO prices.

• India’s ban on refined palm oil could bring downward pressure to CPO

price. India’s ban on refined palm oil from Malaysia and Indonesia is likely to

put a pressure on refined palm oil price vs. crude palm oil. While there are

China and Pakistan who could emerge as the ready off-takers to mop up the

residue left by India, this development could bring volatilities to CPO price.

• US – China trade deal is unlikely to bring significant impact in a short

time. We believe trade agreement between US and China will still hinge on

pricing. Our particular interest in the trade deal is soybean. We believe China

will honour the volume that it would export, provided that pricing is sensible.

We saw China going back to Brazil for soybean imports in December after the

premium on US soybeans widened ahead of the trade agreement signing.

Further Brazil is set to have a bumper crop in 1H20; cheaper prices could keep

China buying from its South American suppliers.

Focus on CPO price leverage players; top picks are SDPL and LSIP

• Sime Darby Plantation (SDPL MK, RM5.31, Outperform, TP: RM6.00, raised

from RM5.30). Management will focus on cutting operating costs further in

FY20E. Sime Plant has a high operating leverage and EPS is sensitive to CPO

price. Further cost cuts should improve margins in FY20E onwards.

• London Sumatra (LSIP IJ, Rp1,340, Outperform, TP: Rp1,800, raised from

Rp1,620). LSIP could benefit from relatively higher production volume, coupled

with the elevated CPO price, should translate to higher EPS growth. LSIP is

also highly correlated to CPO price vs. AALI at 0.7 vs 0.5.

Outlook

• CPO price should remain elevated, underpinned by stronger fundamentals.

3,040

2,900

2,720

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

CPO Px Cons MQe

Ticker Rec.

Mkt Cap

(USD 'mil)

(lcy)

TSR

(%)

SDPL MK OP 8,953 5.31 6.00 14.5%

KLK MK N 6,417 24.40 25.00 4.3%

AALI IJ OP 1,785 12,875 15,500 20.4%

LSIP IJ OP 662 1,340 1,800 35.0%

32.6

19.5

6.5

5.4

24.2

KLK MK SDPL MK AALI IJ LSIP IJ

USD 'bil

FY21E EV/ha (USD) Mkt Cap Wtd. Avg.

Macquarie Research ASEAN Plantations

20 January 2020 2

Analysis

CPO price volatility

• We previously highlighted that CY20E would see the meaningful pick-up in CPO price;

fundamentals are looking more compelling. CPO prices saw a strong rebound beginning late-

October 2019 and has since remained elevated, despite some retracement since the news broke out

that India may completely restrict the imports of palm oil from Malaysia due to the diplomatic row. CPO

prices averaged at USD628 (RM2,615) in 4QCY19 vs. CY19 average of USD535 (RM2,234) the rally

started after the November 2019 MPOB stats stock-to-usage (S/U) ratio touched the 10-year average

level of 10.3%. Looking at December 2019 MPOB stats, we see further tightening in the CPO space, as

S/U ratio has now tightened below the 10-year average, albeit marginally at 9.1%.

• MPOB stats might show further S/U ratio tightening as we head towards end-1H20 due to the

cyclical low harvest in 1H of each year and the drop in CPO production during festive seasons as the

Chinese New Year, Ramadhan and Eid will all happen in 1H20. Historically, Ramadhan (fasting month)

has affected CPO production in Malaysia due to less working hours. This could be supportive of CPO

price up until end-1H20.

Fig 1 CPO production declined during fasting month (Ramadhan) since 2014

Note: Irregular trend in 2016 was distorted by the bumper crop post El Nino.

Source: MPOB, Macquarie Research, January 2020

• Despite potential banning of Malaysian CPO by India, China and Pakistan could emerge as the

ready off-takers. While the complete ban of Malaysian palm oil is yet to be confirmed, the restriction of

imports of refined palm oil from Malaysia and Indonesia has already been confirmed by the Indian

Government. India, the world’s largest palm oil importer would see its local refiners stepping up imports

of CPO following this new government policy. While prices of refined palm oil may come under pressure

and premium to crude may come off (generally refined is at a premium of USD50 to crude), this could

spur demand from China and Pakistan who are the key importers of refined palm oil. Based on

December 2019 stats, India makes up 24% of total CPO exports from Malaysia, followed by China and

Pakistan at 13% and 6%, respectively. Impact of lower exports to India was apparent starting from

December 2019, but we expect negotiations between Malaysia and India to commence, with further

discounts offered by Malaysia in order to ensure demand from India is intact in CY20.

Ramadhan

2014

Ramadhan

2015

Ramadhan

2016

Ramadhan

2017

Ramadhan

2018

Ramadhan

2019

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

Jan-2014

Apr-2014

Jul-2014

Oct-2014

Jan-2015

Apr-2015

Jul-2015

Oct-2015

Jan-2016

Apr-2016

Jul-2016

Oct-2016

Jan-2017

Apr-2017

Jul-2017

Oct-2017

Jan-2018

Apr-2018

Jul-2018

Oct-2018

Jan-2019

Apr-2019

Jul-2019

Oct-2019

Tonnes

CPO Production

Macquarie Research ASEAN Plantations

20 January 2020 3

Fig 2 India holds the biggest share of Malaysian CPO

exports since 2014

Fig 3 Total exports was +12% YoY in CY19 supported by

demand from India

Source: MPOB, Macquarie Research, January 2020

• African Swine Fever (AFS) continue to affect the soybean complex as demands for soybean may

decline further, hence less would suppress supply of soybean oil (SBO). Based on the most

recent agriculture data out of China, hog feed has increased by 2% MoM in December 2019, the fourth

consecutive positive month. While this may echo for a recovery trend in hog inventories; hence higher

demand for hog feed, we believe China’s pork price, which trades at a 336% premium over US pork

price, China may continue to import pork shipments from abroad – cumulative pork shipments from

January 2019 to first half of November 2019 already showed a 132% increase YoY. The less need for

soybean (particularly for hog feed) from China should reduce the supply of SBO, as less as there are

less crushing activities. The reduced demand for soymeal could see SBO gaining a higher share of vs.

soymeal in the soybean complex, which should support SBO prices. Based on the fwd-curve of the

soybean complex, the implied oil share could rise to 41.3% in CY20 vs. average of c.37%. This should

support prices across the vegetable oil complex.

• US – China trade deal Phase 1 will not bring immediate impact to prices as orders by China

could be staggered; prices remain as the key determinant. Optimism regarding further pick-up in

soybean purchases by China, ahead of the trade agreement has caused a rally in US soybean prices in

December 2019. According to Oil World, there are evidence of Chinese importers stepping up

purchases from Brazil as the premium of US soybean has widened recently. Brazil is also expecting a

bumper crop in 1H20, which could offer cheaper prices to China. This could suggest the trade deal

would not guarantee an uptrend of Chinese purchases in the US, as pricing matters more. This should

be supportive of SBO prices as we expect S/U ratio to tighten further, hence would impact positively on

other vegetable oil complex, primarily CPO.

• Prices to remain volatile as headline risks loom the CPO market. The ability for the CPO price to

remain elevated or above the RM3,000 mark is not short of several risks – 1) downside risk: the export

data to India in the coming months of MPOB stats will give an indication of inventory growth in CY20;

note that inventory declined by 38% YoY to 2.0mn mt; 2) downside risk: the timing of soybean

purchase by China from the US – if China front loads the purchases of soybeans in 1H20, we could see

China’s soybean stocks expanding and this will impact negatively on soybean prices and eventually

SBO; 3) upside risk: weaker-than-expected CPO production in Malaysia and Indonesia – Malaysia

small holders are applying less fertilisers last year as fertiliser costs increased amidst the low selling

prices of CPO, this has resulted in lower fruit production starting from 4Q19; meanwhile in Indonesia,

dry weather continues to haunt planters especially in Kalimantan – this should also drag the productions

of CPO.

51%

53%

59%

64%

61%

52%

19%

21%

18%

12%

15%

24%

16%

14%

12%

11%

13%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 2019

Others India China Pakistan Netherlands

2,000

4,000

6,000

8,000

10,000

12,000

2014 2015 2016 2017 2018 2019

'000 MT

Others India China

Pakistan Netherlands

Macquarie Research ASEAN Plantations

20 January 2020 4

Demand and Supply

• CPO S/U will be facing true tightness in CY20-21E based on our model. USDA is calling for weaker

production growth YoY in CY20-21E at 8.5% and 1.8%, respectively vs. demand growth YoY of 9.1%

and 2.8%, respectively for the same marketing period. Based on our model we believe demand will

exceed supply in CY20-21E, before supply begins to surpass demand in CY22E. This supports our

further decrease in CPO price starting from CY22E onwards. We believe the demand-supply balance

that the USDA is calling for in CY20E should shape up to be an impactful year for CPO.

• Further, we believe the trade agreement between US and China will begin to bring a wider discount

between CPO and SBO as China buys more soybean from the US as more trade agreement phases

are being agreed upon from CY21E onwards.

• Supply to tick down due to ageing of trees and planting slowdown in recent years due to

environmental, logistical and regulatory constraints. A good example of this is coming from Liberia,

where we saw KLK and Sime Darby Plantations both exit the market either partially or completely. Low

scalability and regulatory constraints have pushed the corporates to abandon the planting project in

order to save the groups’ costs. Higher fertiliser costs have also caused smallholders to apply smaller

amounts of fertilisers, which came at the expense of the crop yield.

• Demand for CPO will be strongly supported by the biodiesel mandate in Indonesia as food and

oleochemical demands are likely to be flat. Based on our model, we expect Indonesian CPO

biodiesel demand to grow 29% and 9% in CY20-21E, respectively (Fig 5), taking the CPO biodiesel

demand to 10.8mn mt and 11.8mn mt for the period above – whereas overall global biodiesel demand

should grow at 6.2% and 9.1% in CY20-21E, respectively (Fig 4). However, despite the strong demand

pick-up from the mandatory blending in Indonesia, the palm oil – gas oil (POGO) spread has widened,

with palm oil trading at a premium to gas oil, as such our house outlook for oil prices imply that it will

remain less supportive of discretionary blending.

Fig 4 CPO S/U ratio will see further tightening in CY20-21E

Source: USDA, Oil World, Company data, Macquarie Research, January 2020

Tons mn 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Production 59.9 62.8 59.2 68.2 72.0 72.0 74.4 77.3 79.9

- Indonesia 31.5 33.4 32.4 36.8 41.0 40.6 41.8 43.6 44.9

- Malaysia 19.7 20.0 17.3 19.9 19.9 19.5 19.9 20.3 20.7

- Other 8.8 9.4 9.5 11.5 11.2 11.9 12.7 13.5 14.3

Demand 59.4 60.9 62.8 65.3 70.1 72.7 76.2 78.5 79.5

- Food 43.9 46.1 46.4 48.3 50.7 51.3 51.9 52.5 53.0

- Oleochems 5.3 6.1 5.6 5.9 6.1 6.2 6.4 6.5 6.7

- Biodiesel 10.2 8.7 10.7 11.0 13.8 16.9 17.9 19.5 19.8

Stock-to-Use (%) 19.6 21.1 16.4 20.0 21.4 19.7 16.4 14.4 14.7

10-year average 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6

Growth 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Production 5.9% 4.7% -5.6% 15.2% 5.6% -0.1% 3.3% 4.0% 3.3%

- Indonesia 9.7% 6.0% -3.0% 13.6% 11.4% -1.0% 3.0% 4.3% 3.0%

- Malaysia 2.4% 1.5% -13.2% 15.0% -0.3% -1.7% 2.0% 2.0% 2.0%

Demand 2.9% 2.6% 3.0% 4.0% 7.4% 3.7% 4.9% 3.1% 1.2%

- Food 2.5% 5.0% 0.6% 4.2% 4.8% 1.3% 1.2% 1.1% 1.1%

- Oleochems -9.7% 17.0% -8.5% 5.3% 2.5% 2.5% 2.5% 2.5% 2.5%

- Biodiesel 12.8% -15.3% 23.9% 2.4% 25.9% 22.0% 6.2% 9.1% 1.3%

Avg CPO px (US$/T) 739 559 638 648 555 535 750 715 680

Avg CPO px (RM/T) 2,416 2,163 2,645 2,786 2,234 2,217 3,040 2,900 2,720

Macquarie Research ASEAN Plantations

20 January 2020 5

• Indonesia Biodiesel (B30) program

 Effective 1st January 2020, Indonesia expanded the nationwide use of the B30 initiative, which in

total will absorb 9.6mn KL. This translates to a 50% increase in demand from previously 6mn KL

under the B20 program – supportive of the CPO price.

 EU imposed a 5-year tariff on Indonesia biodiesel starting from August 2019, which ranges from

8% to 18% depending on the products, i.e. vegetable oils or animal fats, on alleged unfair practices

of providing subsidies to the producers in the country. As a retaliation, Indonesia raised its tarriffs

on European dairy goods to 10% from 5% previously.

 Biodiesel-related exports, however, accounted for only 17% of total estimated demand in 2019. In

fact, exports of palm oil-based biofuel to the EU have been on a declining trend over the past five

years. Similarly, biodiesel exports’ contribution to overall demand has been declining. As of 2019 it

was 17% vs the past 10-year average of 40%. Consequently, Indonesia is now less susceptible to

such an external event (biodiesel tariff) as domestic demand for biodiesel, hence CPO, remains

robust, which will absorb approximately 89% of total productions in 2020, based on our analysis.

 Looking ahead, Indonesia has mulled moving to B40. The Energy Ministry has reportedly confirmed

the date for the B40 trial as this upcoming April, as the implementation of B30 continues to roll out

since early 2020. The new fuels will have a slightly different formula from the current B30 mix of

FAME & fossil fuels. In comparison, green diesel, which is a combination of refined fossil crude oil

& palm derivatives, will be added into the typical B30 concoction.

 As part of its plan to reduce its widening trade deficit, mainly due to its large oil imports, Indonesia

in our view will remain committed to adopting higher biodiesel content as fuel, in part to help spur

the CPO price, which is crucial to its domestic sector. According to the government, the B30

program will save a total of Rp75tn or US$6bn/year on trades.

Fig 5 Biodiesel supply & demand picture

in LITERS of Biodiesel

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

2021E

Supply

No.

Refineries

Liters m

Biodiesel nameplate capacity

4,281

4,881

5,670

6,887

10,898

11,547

12,000

Liters m

CPO Biodiesel Production

1,800

2,200

2,800

3,000

1,180

3,656

3,416

6,168

9,623

10,500

12,000

Utilization

42%

45%

49%

53%

17%

34%

30%

53%

83%

88%

100%

Demand

Liters m

A) Dom. Biodiesel demand

358

670

1,048

1,600

860

3,008

2,572

3,750

6,923

9,600

10,560

Liters m

B) Export

1,440

1,515

1,800

1,350

343

478

187

1,785

1,456

1,200

Liters m

CPO Biodiesel Demand

1,798

2,185

2,848

2,950

1,203

3,486

2,759

5,536

8,379

10,800

11,760

Production less Demand

-48

-23

170

657

632

1,244

Opening stocks

204

861

1,493

2,737

2,437

Closing stocks

204

861

1,493

2,737

2,437

2,677

Growth

Supply

22%

27%

-61%

210%

-7%

81%

56%

14%

Demand

22%

30%

-59%

190%

-21%

101%

51%

29%

Net inventory stocks

38%

-87%

714%

-40%

500%

322%

73%

83%

-11%

10%

Source: APROBI, Macquarie Research, January 2020

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