By Carey Wong 

Most CPO (crude palm oil) companies reported fairly disappointing 1H13 results recently, no doubt hurt by weaker CPO prices in 2Q13 (CPO prices fell 25% YoY and another 5% QoQ). But going forward, the outlook for CPO prices remains largely muted, given the sluggish economy, as well as the expected rise in production of vegetable oils. While most of the plantation stocks have corrected quite a bit of late, making valuations less demanding, we note that there could still be earnings disappointments for upstream players should CPO prices fall further. We have a SELL on GAR and are reviewing our Hold rating on GPR. While we have a HOLD on WIL, its downstream business may be vulnerable to further economic contraction in China.

1H13 results largely disappointing 
Most CPO companies reported fairly disappointing 1H13 results recently, no doubt hurt by weaker CPO prices in 2Q13 (CPO prices fell 25% YoY and another 5% QoQ). Under our coverage, Golden Agri?s (GAR) 1H13 earnings only met about 34% of our full-year forecast. Global Palm Resources (GPR) was even harder hit, as its 1H net profit met just 27% of our full-year forecast. Wilmar International Limited (WIL) fared slightly better, with 1H13 core earnings meeting 40% of our FY13 forecast, as its substantial downstream business helped to mitigate the poorer upstream showing.

Outlook for CPO prices still quite muted 
But going forward, the outlook for CPO prices remains largely muted, given the sluggish economy in China (one of the biggest buyers of CPO and other vegetable oils), while even Indonesia?s economy could be facing increased headwinds due to reduced spending power on the back of a higher-than-expected spike in inflation and a sharp weakening in the IDR . On the supply side, things are not looking too good either ? CPO production as well as the other vegetable oil substitutes are expected to increase in 2H13. Based on current estimates, market watchers like Oil World believe that ?world production is likely to exceed demand?. The Hamburg-based industry researcher adds that there is little scope for more growth in demand for vegetable oils to make biodiesel, citing unchanged biodiesel mandates in the EU and ?hesitatingly? implemented increases in Brazil and Argentina . 

Avoid upstream players for now 
Most of the plantation stocks have corrected quite a bit of late ? on average, we estimate that these stocks are down about 17% YTD, versus the STI?s 3% slide, making valuations less demanding. But we note that there could still be earnings disappointments for upstream players should CPO prices fall further. We have a  SELL  on GAR and are reviewing our Hold rating on GPR. While we have a  HOLD  on WIL, its downstream business may be vulnerable to further economic contraction in China. 

...Wilmar last @ $3.16...


 

How Wilmar could benefit from Indonesia's latest biodiesel policy

According to CIMB, Indonesia's plan to raise biodiesel usage to B10 as part of its measures  to reduce its current account deficit is good news for regional planters and Indonesian biodiesel producers. 

CIMB noted that  Wilmar will benefit from this policy through higher  local biodiesel sales and better CPO price.

It owns  seven biodiesel plants in Indonesia with an estimated  total capacity of 1.8m tonnes at end-2012. It has
183,518ha of palm oil estates in Indonesia as at 30 June 2013 

Here's more:

We estimate that this could raise  Indonesia?s biodiesel consumption by 1.26m tonnes, which is positive for CPO price (benefiting regional planters) and Indonesia?s biodiesel producers (Wilmar and First Resources).

We expect this news to keep CPO price firm during the high production season. We remain Neutral on the sector, with Wilmar, First Resources and IOI being our top picks.

What Happened
On Friday, the Indonesian government announced plans to reduce oil and gas imports by raising the proportion of biodiesel in fuel from 7.5% to 10% while also making the blending of fuel mandatory.

This measure is aimed at reducing the country?s current account deficit.

What We Think
This is positive for the biodiesel industry in Indonesia and CPO price.Preliminarily, we are looking at a 1.26m tonnes increase in Indonesia?s  consumption of CPO if the 10% blend is implemented.

According to a USDA report, Indonesia consumed around 670m litres of biodiesel in 2012, equivalent to 3.93% of total diesel used by the transportation sector.

We estimate that if the blend is successfully raised to 10%, usage of biodiesel in transportation sector alone will increase to 2bn litres, equivalent to around 4.5% of Indonesia's annual CPO production.

But there are constraints in  implementing B10 in Indonesia, the key ones being logistics (high cost of inter-island shipping, engine warranty from manufacturers, biodiesel blending facilities), enforcement and pricing. As such, we expect a gradual pick-up in Indonesia?s biodiesel consumption.