今天BMD的cpo闭市是RM2970，纽约原油期货是美元124，再跟进目前汇率，cpo"技术上"已经比原油便宜了。
这意味着cpo和co维持两年的溢价已被破坏。虽然这需要多几天来确认，但我们相信已经成定局。
我们不是期货专家，因此不会鼓励你买卖期货和预测风向。我们主要是把种植业的强弱综合性拿来分析，希望找出最佳的买入点，和降低投资风险。
相关连接
29 July 2008
为什么nsop不和chintek合并？
*都有一样的最大股东-Tiong Thye Company Berhad
*种植区都在中马(彭，森，霹，丹)
*董事名单相似
*70%相似的REMUNERATION COMMITTEE
*秘书都是Gan Kok Tiong
*2007 auditor都聘用Ernst & Young的See Huey Beng
2004 auditor都聘用Ernst & Young的Pushpanathan a/l S. A. Kanagarayar
auditor fee给两次而且不打折扣。
*业务都有往来
*一起成立JV到印尼
*股价都在高位，合并起来应该不麻烦，如果说他们的股价是抄在一块的也不过分
不一样的地方是他们拿两份不一样的酬薪
chintek remuneration
nsop remuneration
你觉得他们是好公司吗？如果他们每年拿出丰厚的股息平息"众"怒。应该很少人买两股，所以特别放了一个双引号。
*种植区都在中马(彭，森，霹，丹)
*董事名单相似
*70%相似的REMUNERATION COMMITTEE
*秘书都是Gan Kok Tiong
*2007 auditor都聘用Ernst & Young的See Huey Beng
2004 auditor都聘用Ernst & Young的Pushpanathan a/l S. A. Kanagarayar
auditor fee给两次而且不打折扣。
*业务都有往来
*一起成立JV到印尼
*股价都在高位，合并起来应该不麻烦，如果说他们的股价是抄在一块的也不过分
不一样的地方是他们拿两份不一样的酬薪
chintek remuneration
nsop remuneration
你觉得他们是好公司吗？如果他们每年拿出丰厚的股息平息"众"怒。应该很少人买两股，所以特别放了一个双引号。
chintek怪异的方式成长
chintek有多少的biological asset？这是投资者最想知道的。但打开只有容量300k的年报，讲解实在少。
chintek并没有以company(核心公司)的自利益身份大规模扩张种植版图，几年来他们都是翻种。近的两年，chintek把核心公司(种植)所赚取盈利，70%分作股息，另外30%用来注资joint venture(JV)。
他的股息制度值得激赏，股价可以起到一定程度的保值。但问题出在那里？
问题一 如果以这样的方式扩张，就只能留在小型公司名单里。
不排除这本是大股东意图，他们只想把chintek打造成制造现金的控股工具。值得一提的是chintek的高层手上有nsop股权和私人种植工具(私人种植JV)。
问题二 chintek的种植年轮有衰退现象。
问题三 每年从盈利中拨出30%投入JV，能不能弥补核心公司的不足？
chintek停留在JV的资金，return还不如核心公司高(又没有股息收入)，那么又何必多此一举和大股东搞JV呢？
目前chintek有四个项目的JV，一个是产业，一个是常年亏损的中国食品，两个是印尼种植。
(两个印尼的JV，如果有时间再来讲)
综合问题 你觉得chintek是抗跌股，high efficient，相当照顾股东？
如果，肥料和农药继续上涨，cpo下跌，印尼公关机构刁难打乱扩张步伐，利率上涨？
如果你没有end customer market，就必须从cost下手，但如果cost也做不好margin就不能维持了。
如果说95%的种植公司都是好公司，那么chintek就是好公司。
chintek并没有以company(核心公司)的自利益身份大规模扩张种植版图，几年来他们都是翻种。近的两年，chintek把核心公司(种植)所赚取盈利，70%分作股息，另外30%用来注资joint venture(JV)。
他的股息制度值得激赏，股价可以起到一定程度的保值。但问题出在那里？
问题一 如果以这样的方式扩张，就只能留在小型公司名单里。
不排除这本是大股东意图，他们只想把chintek打造成制造现金的控股工具。值得一提的是chintek的高层手上有nsop股权和私人种植工具(私人种植JV)。
问题二 chintek的种植年轮有衰退现象。
问题三 每年从盈利中拨出30%投入JV，能不能弥补核心公司的不足？
chintek停留在JV的资金，return还不如核心公司高(又没有股息收入)，那么又何必多此一举和大股东搞JV呢？
目前chintek有四个项目的JV，一个是产业，一个是常年亏损的中国食品，两个是印尼种植。
(两个印尼的JV，如果有时间再来讲)
综合问题 你觉得chintek是抗跌股，high efficient，相当照顾股东？
如果，肥料和农药继续上涨，cpo下跌，印尼公关机构刁难打乱扩张步伐，利率上涨？
如果你没有end customer market，就必须从cost下手，但如果cost也做不好margin就不能维持了。
如果说95%的种植公司都是好公司，那么chintek就是好公司。
28 July 2008
asiatic:Company Update 22 July 2008
Price:RM6.10
Market capitalization:RM4,606 million
Analyst:Linda Koh
Recommendation:Buy
Issued capital (mil):756.2
52-week price range (RM):4.80-9.40
Major shareholders (%) : Genting 55% , EPF 7.4%
Higher CPO price and FFB growth support earnings
Leverage on strong balance sheet for expansion
Decent valuations – 2008 P/E of 9.8 times
Key stock statistics
----------2007-2008E
EPS (sen) 45.6 62.2
P/E (x) 13.4 9.8
DPS (sen) 14.0 17.0
NTA/share (RM) 2.71 3.21
Share Price Chart
Recent Developments
Asiatic Development is working on acquiring more plantation land bank to sustain growth momentum over the longer-term.
The company recently formed a second joint venture to acquire some 45,000 ha of land bank in Kalimantan, Indonesia. Asiatic paid US$9 million as initial investment for a 60% equity stake in the venture. Its shareholding is expected to increase gradually to about 77% with total investment estimated at some US$47 million over the next two years. The company has secured location permit for a land area of about 12,500 ha and hopes to start planting up before the end of this year.
Meanwhile, progress on the first joint venture, to acquire 98,300 ha of land under a 70:30 venture with Indonesian-based Sepanjang group, has been slower than expected. Planting up on the first 14,261 ha is delayed due to some issues with the local indigenous people. About 3,000 ha have been planted at end-May. Asiatic targets to complete planting on 7,500 ha by end- 2008 and the remaining area by 2009.
On the other hand, its biotechnology venture, Asiatic Centre for Genome Technology (ACGT), is progressing ahead of schedule. The company, a joint venture with US-based Synthetic Genomics Inc, recently completed the first draft assembly and annotation of the oil palm genome.
ACGT expects that its research will culminate in the commercial screening of feedstocks by 2012-2013. The identification of molecular markers and genes that control factors such as yield, height and oil quality will enhance future oil palm breeding programmes.
The company is also undertaking an in-depth genomic, physiological and biochemical analysis of Jatropha. The plant produces oil-rich seeds and is very hardy – it thrives on almost all kinds of soil, including those unsuited for field crops such as wasteland. Jatropha oil can be processed into high quality biodiesel and has higher oil yields than soybean, corn and rapeseed.
Outlook and Recommendation
We expect Asiatic to report better earnings in 2Q08 compared to the previous quarter on the back of slightly higher average crude palm oil (CPO) prices. Asiatic’s selling prices averaged at about RM3,400 per tonne in 1Q08. For 1H08, CPO prices averaged at around RM3,500 per tonne.
The CPO market has been buffeted by a bout of volatility in the past week. The benchmark futures contracts traded on Bursa Derivatives fell below RM3,300 per tonne mirroring the sharp decline in crude oil prices. That triggered a sell off on plantation stocks on the local bourse.
Crude oil tumbled some 12% from record high prices in a single week on concerns that the slowing global economy will soon dent demand. The jury is still out on whether this latest price retreat is sustainable. Global spare production capacity is limited, which leaves prices vulnerable to supply disruptions in key oil producing countries.
Lower crude oil prices generally mean less incentive to produce biofuel, in which traditional food crops like corn and soybean are used as feedstock. Having said that, biofuel targets in the US and European Union are mandatory and subsidised. Thus, production is not dependent on crude oil prices. For instance, the EU has set a target of at least 5.75% of biofuel used in vehicles by 2010 and 10% by 2020.
Additionally, global demand for edible oils is rising. Stock levels for oilseeds are still fairly tight while the risks of more weather-related supply disruptions remain high. Hence, we believe the underlying fundamentals supporting CPO prices are still pretty much intact.
We estimate Asiatic’s 2008 net profit at roughly RM470 million or 62.2 sen per share. This is assuming an average CPO selling price of RM3,300 per tonne and 5% growth in fresh fruit bunch (FFB) production. FFB growth should remain around similar levels in the next few years. Contributions from the Indonesian ventures will only materialize over the longer-term.
Going forward, we are assuming more conservative CPO prices of RM2,800 per tonne, which translates into lower earnings of RM375 million and RM384 million, respectively for 2009-2010.
Nevertheless, these numbers are still very robust by historical standards. The stronger cash flow and balance sheet will support the company’s expansion for sustained longer-term growth.
Its cash pile increased from RM261.4 million at end-2006 to RM495.1 million at end-2007 and RM524.3 million at end-1Q08. This is expected to increase further in the foreseeable future.
Asiatic is on the lookout to acquire more land bank and targets to eventually plant up 6,000-10,000 ha annually in total. It is also planning to spend about RM50 million annually in ACGT for continued research and development. Although the biotechnology venture has no returns in the short term, future gains for producing high-yielding oil crops could be vast, especially with the growing demand for food and energy even as land becomes increasingly scarce.
In short, Asiatic has in place strategies that will promote the company’s growth over the longer-term. We maintain our BUY recommendation. Its shares are trading at fairly decent valuations – P/E for 2008-2009 is estimated at roughly 9.8 and 12.3 times, respectively.
Net dividends are expected to increase in the current year, in line with the higher earnings. We estimate dividends at 17 sen per share, giving shareholders a net yield of 2.1%.
Profit & Loss Analysis / Per Share Data
Market capitalization:RM4,606 million
Analyst:Linda Koh
Recommendation:Buy
Issued capital (mil):756.2
52-week price range (RM):4.80-9.40
Major shareholders (%) : Genting 55% , EPF 7.4%
Higher CPO price and FFB growth support earnings
Leverage on strong balance sheet for expansion
Decent valuations – 2008 P/E of 9.8 times
Key stock statistics
----------2007-2008E
EPS (sen) 45.6 62.2
P/E (x) 13.4 9.8
DPS (sen) 14.0 17.0
NTA/share (RM) 2.71 3.21
Share Price Chart
Recent Developments
Asiatic Development is working on acquiring more plantation land bank to sustain growth momentum over the longer-term.
The company recently formed a second joint venture to acquire some 45,000 ha of land bank in Kalimantan, Indonesia. Asiatic paid US$9 million as initial investment for a 60% equity stake in the venture. Its shareholding is expected to increase gradually to about 77% with total investment estimated at some US$47 million over the next two years. The company has secured location permit for a land area of about 12,500 ha and hopes to start planting up before the end of this year.
Meanwhile, progress on the first joint venture, to acquire 98,300 ha of land under a 70:30 venture with Indonesian-based Sepanjang group, has been slower than expected. Planting up on the first 14,261 ha is delayed due to some issues with the local indigenous people. About 3,000 ha have been planted at end-May. Asiatic targets to complete planting on 7,500 ha by end- 2008 and the remaining area by 2009.
On the other hand, its biotechnology venture, Asiatic Centre for Genome Technology (ACGT), is progressing ahead of schedule. The company, a joint venture with US-based Synthetic Genomics Inc, recently completed the first draft assembly and annotation of the oil palm genome.
ACGT expects that its research will culminate in the commercial screening of feedstocks by 2012-2013. The identification of molecular markers and genes that control factors such as yield, height and oil quality will enhance future oil palm breeding programmes.
The company is also undertaking an in-depth genomic, physiological and biochemical analysis of Jatropha. The plant produces oil-rich seeds and is very hardy – it thrives on almost all kinds of soil, including those unsuited for field crops such as wasteland. Jatropha oil can be processed into high quality biodiesel and has higher oil yields than soybean, corn and rapeseed.
Outlook and Recommendation
We expect Asiatic to report better earnings in 2Q08 compared to the previous quarter on the back of slightly higher average crude palm oil (CPO) prices. Asiatic’s selling prices averaged at about RM3,400 per tonne in 1Q08. For 1H08, CPO prices averaged at around RM3,500 per tonne.
The CPO market has been buffeted by a bout of volatility in the past week. The benchmark futures contracts traded on Bursa Derivatives fell below RM3,300 per tonne mirroring the sharp decline in crude oil prices. That triggered a sell off on plantation stocks on the local bourse.
Crude oil tumbled some 12% from record high prices in a single week on concerns that the slowing global economy will soon dent demand. The jury is still out on whether this latest price retreat is sustainable. Global spare production capacity is limited, which leaves prices vulnerable to supply disruptions in key oil producing countries.
Lower crude oil prices generally mean less incentive to produce biofuel, in which traditional food crops like corn and soybean are used as feedstock. Having said that, biofuel targets in the US and European Union are mandatory and subsidised. Thus, production is not dependent on crude oil prices. For instance, the EU has set a target of at least 5.75% of biofuel used in vehicles by 2010 and 10% by 2020.
Additionally, global demand for edible oils is rising. Stock levels for oilseeds are still fairly tight while the risks of more weather-related supply disruptions remain high. Hence, we believe the underlying fundamentals supporting CPO prices are still pretty much intact.
We estimate Asiatic’s 2008 net profit at roughly RM470 million or 62.2 sen per share. This is assuming an average CPO selling price of RM3,300 per tonne and 5% growth in fresh fruit bunch (FFB) production. FFB growth should remain around similar levels in the next few years. Contributions from the Indonesian ventures will only materialize over the longer-term.
Going forward, we are assuming more conservative CPO prices of RM2,800 per tonne, which translates into lower earnings of RM375 million and RM384 million, respectively for 2009-2010.
Nevertheless, these numbers are still very robust by historical standards. The stronger cash flow and balance sheet will support the company’s expansion for sustained longer-term growth.
Its cash pile increased from RM261.4 million at end-2006 to RM495.1 million at end-2007 and RM524.3 million at end-1Q08. This is expected to increase further in the foreseeable future.
Asiatic is on the lookout to acquire more land bank and targets to eventually plant up 6,000-10,000 ha annually in total. It is also planning to spend about RM50 million annually in ACGT for continued research and development. Although the biotechnology venture has no returns in the short term, future gains for producing high-yielding oil crops could be vast, especially with the growing demand for food and energy even as land becomes increasingly scarce.
In short, Asiatic has in place strategies that will promote the company’s growth over the longer-term. We maintain our BUY recommendation. Its shares are trading at fairly decent valuations – P/E for 2008-2009 is estimated at roughly 9.8 and 12.3 times, respectively.
Net dividends are expected to increase in the current year, in line with the higher earnings. We estimate dividends at 17 sen per share, giving shareholders a net yield of 2.1%.
Profit & Loss Analysis / Per Share Data
leweko,share spilt after bonus
bonus 1 for every 20.Thereafter,share spilt subdivision each into 2.
30/06/2008 share price adjustment : 10/21
当前股价 x 2.1 就可还原以前的股价
30/06/2008 share price adjustment : 10/21
当前股价 x 2.1 就可还原以前的股价
27 July 2008
tsh update
这份报告很难看得懂，TSH有太多diversified business，joint venture entity不透明(只可一年一次在年报查询)，plantation and milling and Bio-Integration三者mix在一起，数据又不明确。基本上可以等他6倍本益比再做打算。
Stock Code: 9059
Price: MYR2.45
12-Month Target Price: MYR2.70
Date: July 25, 2008
HOLD S&P
GICS: Consumer Staples/Agricultural Products
Market Value - Total: MYR1,011.7 mln
Summary: TSH Resources (TSH) is an integrated plantation group, with oil palm plantations and palm oil mills in Sabah and Indonesia, a refinery and bio-energy power plants. The group is also involved in the manufacturing of engineered hardwood flooring and cocoa products.
Analyst: Siti Rudziah Salikin
Highlights
TSH is a small oil palm planter in Sabah with about 4,500 ha of planted oil palm but having expanded its plantations in Indonesia, it now holds a total land bank of 80,000 ha. The planted area, totaling 20,000 ha, is still young (11,500 ha consist of immature palms), and will support double-digit production growth over the next 3-4 years. Longer-term growth will hinge on the progress of new plantings in Indonesia.
Downstream, TSH has palm oil mills, a refinery and bio-energy power plants, which use solid and liquid wastes from the mills as raw materials. The additional benefit is that bio-energy project allows TSH to apply for carbon credits, which are tradable.
In spite of the current downward pressure on the price of CPO, we believe the downside will be supported by the strong underlying demand for and the tight global supplies of other edible oils.
TSH, via 65%-owned Ekowood International (EKO MK, MYR0.50, Not Ranked), produces hardwood flooring but we are cautious on its prospects due to the uncertain outlook of the property markets in Europe and the U.S., its main export markets.
Investment Risks
Risks to our recommendation and target price include a continued downtrend in CPO price and slow progress of its new plantings. A significant economic downturn in Europe and the U.S. would also hurt prospects for its flooring business.
Recommendation
We initiate coverage on TSH with a Hold recommendation and a 12- month target price of MYR2.70 per share.
Despite the potential long-term growth prospects from the plantations in Indonesia, we prefer to be less aggressive in our valuation due to execution risks with the new plantings. A less promising earnings outlook for the wood flooring division will also place additional bearing on its valuation, in our opinion.
The target price is derived from a PER-based sum-of-parts valuation and includes our projected dividend. We assign a PER of 10x to 2009 earnings for the palm and bio-integration operations. The PER is within the range of our target multiples of 8x-10x for medium-sized plantation stocks. We accord a PER of between 6x and 7x for the wood-based and cocoa manufacturing divisions, in line with the singledigit forward PER for timber and food-based stocks.
We project a higher dividend of 7.5 sen for 2008. The projected payout of about 26% is slightly lower than TSH’s policy of 30% due to its high capex requirements mostly to fund the new plantings in Indonesia. We project net gearing to increase to between 40% and 50% (at group level) in 2009 from 29.3% at end 2007.
Corporate Social Responsibility (CSR) issues were addressed in TSH’s 2007 annual report, which reviewed the group’s CSR initiatives pertaining to human resources, workplace and community.
Background
Founded in 1979, TSH was initially involved in the marketing and distribution of cocoa products. TSH started its oil palm plantations in Sabah in the late 1980s. Today, it has integrated palm oil operations (plantations, milling and a refinery) that include bio-energy generation as its core business while its cocoa business is a secondary activity. It also owns 65.1% of Ekowood International which is a leading manufacturer of hardwood flooring in the country.
The group is helmed by founder, Tan Soon Hong (Executive Chairman) and his sons, Dato’ Kelvin Tan and Tan Aik Sim, who are Managing Director and Chief Executive Officer, respectively for both TSH and Ekowood. Mr Tan’s two other sons, Tan Aik Kiong and Tan Aik Yong also sit on the board as Executive Director and alternate Director, respectively.
Organization structure
Palm and bio-integration operations
Oil palm plantations
TSH is a small planter in Sabah with about 4,500 ha of planted oil palms. Nevertheless, since venturing into Indonesia in 2003, it has since acquired several companies with plantation land in Indonesia and increased its total land bank to about 80,000 ha. About 20,000 ha of the land are planted with oil palms (including the estates in Sabah). On the unplanted land in Indonesia, the plan is to develop about 10,000-15,000 ha p.a. but progress has been delayed by localized land issues, which are still being addressed. About 2,000-3,000 ha are expected to be planted in 2008 but TSH anticipates the planting pace to pick up in 2009.
The planted palms are very young with 11,500 ha immature (less than three years old) and 8,500 ha between the ages of four and 16 years. The estates in Sabah are already at the prime production age, thus growth prospects will be limited, in our opinion. The estates produced a comparatively high fresh fruit bunches (FFB) yield of 28 tons/ha in 2006 and 29 tons/ha in 2007. Future growth in FFB production will come from the estates in Indonesia. The immature estates are expected to come into harvesting in stages and the yield is expected to gradually improve as young palms reach peak maturity. This will support a double-digit growth in FFB production over the next 3-4 years. The new plantings will sustain the growth in the longer term.
Downstream, TSH has three palm oil mills in Sabah and one in Sumatera, Indonesia with a combined processing capacity of 1.5 mln tons of FFB p.a.. The mills currently operate at about 70%-75% capacity. Presently, about 15%-20% of the FFB processed come at the mills from TSH’s own plantations but the in-house supply will gradually increase along with the growth in FFB production. TSH plans to add one new mill in Indonesia in 2009 and another mill in 2010 to cater for the projected increase in FFB output.
TSH also owns palm oil refinery and palm kernel crushing plants (in Sabah), which are set up via a 50:50 joint venture with Wilmar International (WIL SP, SGD4.30, Not Ranked). Wilmar is a welldiversified agribusiness group with an extensive distribution network to undertake the marketing of the palm products. The refinery commenced operations in January 2007 and currently runs at about half of its annual capacity of 750,000 tons. The ramping up of production will be gradual with the full utilization expected in 4-5 years. The venture contributed MYR13.1 mln to TSH’s pre-tax profit in 2007.
Palm bio-integration
The bio-integration operations involve recycling the wastes from palm oil millings into energy and paper.
Presently, TSH has two bio-mass power plants, which use empty fruit bunches (EFB), and a biogas power plant, which uses palm oil mill effluent or waste water, to generate electricity and industrial steam. The first bio-mass power plant (14MW) sells the electricity to Sabah Electricity Board (SEB). TSH has a 21-year renewable energy purchase agreement with SEB to sell up to 10MW of the electricity to SEB at 21.25 sen per kwh from the date of the plant becoming operational, which was in 2005. The other plant (9.8MW) is 50%-owned and was set up in a similar joint venture with Wilmar to power the refinery. The biogas power plant (2.5MW) is currently on a trial run and will supply the electricity and steam to TSH’s new pulp and paper (Ekopaper) plant.
TSH is setting up a 30,000 tons p.a. Ekopaper plant to process EFB into pulp and paper. The plant is targeted for operational in mid-2009.
The bio-integration operations allow TSH to extract more value from its palm oil operations while at the same time contribute to the conservation of the environment. As an additional benefit, the project allows TSH to apply for carbon credits, which can either be: (i) sold to other companies or governments to meet their greenhouse gas emission requirements under the Kyoto Protocol; or (ii) traded at a climate exchange. TSH’s biogas power plant qualifies as a Kyoto’s Clean Development Mechanism project and is entitled to carbon credits, while the applications for its two bio-mass power plants are still awaiting approval. TSH is looking at generating 30,000 tons of carbon credits in 2008 and 80,000 tons in 2009 and has committed to sell half of its carbon credits output to a European purchaser at EUR$12/ton. Altogether, TSH expects to generate up to 200,000 tons of carbon credits from its bio-energy plants.
Other businesses
Cocoa and vegetable fat manufacturing
TSH’s cocoa processing factories are located in Port Klang and housed under CocoaHouse Industries Sdn Bhd and TSH Industries Sdn Bhd. CocoaHouse produces cocoa butter, cocoa cake and cocoa powder. The products are exported to bakeries, confectioneries, beverages and chocolate manufacturers in the U.S., Australia, New Zealand, Korea, Egypt, Russia, Iran, the Philippines and India. TSH Industries processes low grade cocoa beans and illipe nuts into deodorized expeller cocoa butter, deodorized extracted cocoa butter, neutralized and bleached illipe butter. The operations generated a decent operating profit of MYR21.6 mln (17.1% of group profit) in 2007.
Wood-based manufacturing and reforestation
The division contributed MYR19.9 mln or 15.7% to group operating profit for 2007. Ekowood manufactures engineered solid hardwood flooring using local and imported wood species at its factory in Gopeng, Perak. The products cater to the export market, mainly to Europe (which accounted for 57% of Ekowood’s revenue for 2007). Ekowood has gained some ground in the domestic market, thanks to the robust high-end property market, and has increased domestic sales to 17% of revenue in 2007 from 9.2% in 2005. Ekowood invested about MYR20 mln in 2007 to upgrade the ESHF plant and expand the capacity to 25 mln sq. ft. from 14 mln-15 mln sq. ft.. However, we understand that the performance of the new machinery has not been up to specifications, and this will delay the commissioning to 2009.
TSH also has 100-year rights, which was awarded in 1997, to undertake forest rehabilitation, conservation and planting activities on 123,000 ha of forestry land in Ulu Tungud, Sabah. The forest plantation program involves an area of 11,000 ha and is funded by British American Tobacco (BAT MK, MYR41.00, Hold). The planting began in 2004 and to-date, about 5,000 ha have been planted. Although the return involves a long gestation period as it requires at least 10 years for the trees to mature, the project reflects TSH’s strong commitment towards the protection of the environment.
Earnings Outlook
The palm and bio-integration operations, which contributed 67.2% to group operating profit for 2007, will continue to lead the group’s performance going forward, in our opinion. We project a 26% YoY growth in net profit for 2008 to MYR119.6 mln driven by increased production from TSH’s own plantations in Indonesia and higher palm oil price. We assume a lower CPO price for 2009 and expect net profit for the year to slid 2.3% YoY to MYR116.9 mln.
The recent crude oil price slide, the high inventory of palm oil in Malaysia and the review of the biofuel target (of 10% of all transport fuel from renewable sources by 2020) by the European Union, are factors that have put downward pressure on the price of CPO of late. However, we still maintain our view that the downside will be supported by the strong underlying demand for and the tight global supplies of other edible oils, including soybean oil. We are keeping our forecasted CPO price of MYR3,200/ton for 2008 and MYR3,000/ton for 2009.
We expect the lower CPO price for 2009 to be partly made up by our projected double-digit growth in production and better margins for the refinery. The 14MW biomass power plant is expected to achieve its optimal efficiency in 2008 and contribute MYR7 mln–MYR8 mln p.a. in operating profit from the electricity sale. Profit contributions from carbon credits are not expected to be significant in 2008-2009.
We are cautious on the prospect of the wood flooring business. While the capacity increase may support volume growth, the uncertain outlook of the property markets in Europe and the U.S. and the volatility of raw material prices could affect pricing and profitability. We also believe the local highend properties have peaked, which is likely to put a brake on demand growth from the domestic market. Similarly, price inflation and weaker consumer spending may slow down the demand for cocoa products while the high prices of cocoa beans are likely to put pressure on margins.
Valuation
TSH’s share price has corrected 25.7% over the past two months, lowering the stock’s PER to a more reasonable level of 8.5x (based on projected earnings for 2008). Although the plantations in Indonesia will provide strong growth prospects for a long-term period, there are execution risks due to the local land issues, which could further delay the rate of new plantings. A less promising earnings prospect for the wood flooring division will place additional bearing on valuation, in our opinion. Thus, we prefer to be less aggressive in our valuation for the stock.
We value the stock using a PER-based sum-of-parts and add on our projected DPS to arrive at a value of MYR2.70 per share for the stock. We assign a PER of 10x to projected 2009 net EPS for the palm and biointegration operations. The assigned PER is within the range of our target multiples for medium-sized plantation stocks of 8x-10x. We accord a PER of between 6x and 7x to earnings for the wood-based and cocoa manufacturing divisions, taking into consideration the low single-digit forward multiples for Ekowood (and other downstream timber producers) and food-based manufacturers.
TSH has a long-term dividend payout policy of 30%. We project a dividend of 7.5 sen per share or a payout of about 26% for 2008 as we expect TSH to conserve part of the cash for its new plantings, palm oil mills and Ekopaper plant. At an estimated planting cost of MYR12,000/ha, TSH will need over MYR600 mln – MYR700 mln to develop the unplanted areas of 60,000 ha in Indonesia over the next 6-7 years. Net gearing is projected to increase but should remain at a comfortable level of between 40% and 50% (at group level) in 2009 from 29.3% at end-2007.
Recent Development
June 2008: TSH entered into a sale and purchase agreement to acquire a 100% interest in Martinique Cove Pte Ltd for USD5.7 mln. Martinique holds a 90% stake in PT Mitra Jaya Cemerlang, which 15,000 ha of land with izin lokasi (location permit) status in Central Kalimantan.
June 2007: TSH proposed to acquire 100% stake in Elaeis Oversea Pte Ltd for USD4.7 mln. Elaeis holds a 90% interest in PT Farinda, which owns 15,000 ha of land with izin lokasi status in East Kalimantan. The completion time for the proposed acquisition has been extended to Sep. 30, 2008.
Recommendation and Target Price History
Date/Recommendation/Target Price
New/Hold/2.70
Stock Code: 9059
Price: MYR2.45
12-Month Target Price: MYR2.70
Date: July 25, 2008
HOLD S&P
GICS: Consumer Staples/Agricultural Products
Market Value - Total: MYR1,011.7 mln
Summary: TSH Resources (TSH) is an integrated plantation group, with oil palm plantations and palm oil mills in Sabah and Indonesia, a refinery and bio-energy power plants. The group is also involved in the manufacturing of engineered hardwood flooring and cocoa products.
Analyst: Siti Rudziah Salikin
Highlights
TSH is a small oil palm planter in Sabah with about 4,500 ha of planted oil palm but having expanded its plantations in Indonesia, it now holds a total land bank of 80,000 ha. The planted area, totaling 20,000 ha, is still young (11,500 ha consist of immature palms), and will support double-digit production growth over the next 3-4 years. Longer-term growth will hinge on the progress of new plantings in Indonesia.
Downstream, TSH has palm oil mills, a refinery and bio-energy power plants, which use solid and liquid wastes from the mills as raw materials. The additional benefit is that bio-energy project allows TSH to apply for carbon credits, which are tradable.
In spite of the current downward pressure on the price of CPO, we believe the downside will be supported by the strong underlying demand for and the tight global supplies of other edible oils.
TSH, via 65%-owned Ekowood International (EKO MK, MYR0.50, Not Ranked), produces hardwood flooring but we are cautious on its prospects due to the uncertain outlook of the property markets in Europe and the U.S., its main export markets.
Investment Risks
Risks to our recommendation and target price include a continued downtrend in CPO price and slow progress of its new plantings. A significant economic downturn in Europe and the U.S. would also hurt prospects for its flooring business.
Recommendation
We initiate coverage on TSH with a Hold recommendation and a 12- month target price of MYR2.70 per share.
Despite the potential long-term growth prospects from the plantations in Indonesia, we prefer to be less aggressive in our valuation due to execution risks with the new plantings. A less promising earnings outlook for the wood flooring division will also place additional bearing on its valuation, in our opinion.
The target price is derived from a PER-based sum-of-parts valuation and includes our projected dividend. We assign a PER of 10x to 2009 earnings for the palm and bio-integration operations. The PER is within the range of our target multiples of 8x-10x for medium-sized plantation stocks. We accord a PER of between 6x and 7x for the wood-based and cocoa manufacturing divisions, in line with the singledigit forward PER for timber and food-based stocks.
We project a higher dividend of 7.5 sen for 2008. The projected payout of about 26% is slightly lower than TSH’s policy of 30% due to its high capex requirements mostly to fund the new plantings in Indonesia. We project net gearing to increase to between 40% and 50% (at group level) in 2009 from 29.3% at end 2007.
Corporate Social Responsibility (CSR) issues were addressed in TSH’s 2007 annual report, which reviewed the group’s CSR initiatives pertaining to human resources, workplace and community.
Background
Founded in 1979, TSH was initially involved in the marketing and distribution of cocoa products. TSH started its oil palm plantations in Sabah in the late 1980s. Today, it has integrated palm oil operations (plantations, milling and a refinery) that include bio-energy generation as its core business while its cocoa business is a secondary activity. It also owns 65.1% of Ekowood International which is a leading manufacturer of hardwood flooring in the country.
The group is helmed by founder, Tan Soon Hong (Executive Chairman) and his sons, Dato’ Kelvin Tan and Tan Aik Sim, who are Managing Director and Chief Executive Officer, respectively for both TSH and Ekowood. Mr Tan’s two other sons, Tan Aik Kiong and Tan Aik Yong also sit on the board as Executive Director and alternate Director, respectively.
Organization structure
Palm and bio-integration operations
Oil palm plantations
TSH is a small planter in Sabah with about 4,500 ha of planted oil palms. Nevertheless, since venturing into Indonesia in 2003, it has since acquired several companies with plantation land in Indonesia and increased its total land bank to about 80,000 ha. About 20,000 ha of the land are planted with oil palms (including the estates in Sabah). On the unplanted land in Indonesia, the plan is to develop about 10,000-15,000 ha p.a. but progress has been delayed by localized land issues, which are still being addressed. About 2,000-3,000 ha are expected to be planted in 2008 but TSH anticipates the planting pace to pick up in 2009.
The planted palms are very young with 11,500 ha immature (less than three years old) and 8,500 ha between the ages of four and 16 years. The estates in Sabah are already at the prime production age, thus growth prospects will be limited, in our opinion. The estates produced a comparatively high fresh fruit bunches (FFB) yield of 28 tons/ha in 2006 and 29 tons/ha in 2007. Future growth in FFB production will come from the estates in Indonesia. The immature estates are expected to come into harvesting in stages and the yield is expected to gradually improve as young palms reach peak maturity. This will support a double-digit growth in FFB production over the next 3-4 years. The new plantings will sustain the growth in the longer term.
Downstream, TSH has three palm oil mills in Sabah and one in Sumatera, Indonesia with a combined processing capacity of 1.5 mln tons of FFB p.a.. The mills currently operate at about 70%-75% capacity. Presently, about 15%-20% of the FFB processed come at the mills from TSH’s own plantations but the in-house supply will gradually increase along with the growth in FFB production. TSH plans to add one new mill in Indonesia in 2009 and another mill in 2010 to cater for the projected increase in FFB output.
TSH also owns palm oil refinery and palm kernel crushing plants (in Sabah), which are set up via a 50:50 joint venture with Wilmar International (WIL SP, SGD4.30, Not Ranked). Wilmar is a welldiversified agribusiness group with an extensive distribution network to undertake the marketing of the palm products. The refinery commenced operations in January 2007 and currently runs at about half of its annual capacity of 750,000 tons. The ramping up of production will be gradual with the full utilization expected in 4-5 years. The venture contributed MYR13.1 mln to TSH’s pre-tax profit in 2007.
Palm bio-integration
The bio-integration operations involve recycling the wastes from palm oil millings into energy and paper.
Presently, TSH has two bio-mass power plants, which use empty fruit bunches (EFB), and a biogas power plant, which uses palm oil mill effluent or waste water, to generate electricity and industrial steam. The first bio-mass power plant (14MW) sells the electricity to Sabah Electricity Board (SEB). TSH has a 21-year renewable energy purchase agreement with SEB to sell up to 10MW of the electricity to SEB at 21.25 sen per kwh from the date of the plant becoming operational, which was in 2005. The other plant (9.8MW) is 50%-owned and was set up in a similar joint venture with Wilmar to power the refinery. The biogas power plant (2.5MW) is currently on a trial run and will supply the electricity and steam to TSH’s new pulp and paper (Ekopaper) plant.
TSH is setting up a 30,000 tons p.a. Ekopaper plant to process EFB into pulp and paper. The plant is targeted for operational in mid-2009.
The bio-integration operations allow TSH to extract more value from its palm oil operations while at the same time contribute to the conservation of the environment. As an additional benefit, the project allows TSH to apply for carbon credits, which can either be: (i) sold to other companies or governments to meet their greenhouse gas emission requirements under the Kyoto Protocol; or (ii) traded at a climate exchange. TSH’s biogas power plant qualifies as a Kyoto’s Clean Development Mechanism project and is entitled to carbon credits, while the applications for its two bio-mass power plants are still awaiting approval. TSH is looking at generating 30,000 tons of carbon credits in 2008 and 80,000 tons in 2009 and has committed to sell half of its carbon credits output to a European purchaser at EUR$12/ton. Altogether, TSH expects to generate up to 200,000 tons of carbon credits from its bio-energy plants.
Other businesses
Cocoa and vegetable fat manufacturing
TSH’s cocoa processing factories are located in Port Klang and housed under CocoaHouse Industries Sdn Bhd and TSH Industries Sdn Bhd. CocoaHouse produces cocoa butter, cocoa cake and cocoa powder. The products are exported to bakeries, confectioneries, beverages and chocolate manufacturers in the U.S., Australia, New Zealand, Korea, Egypt, Russia, Iran, the Philippines and India. TSH Industries processes low grade cocoa beans and illipe nuts into deodorized expeller cocoa butter, deodorized extracted cocoa butter, neutralized and bleached illipe butter. The operations generated a decent operating profit of MYR21.6 mln (17.1% of group profit) in 2007.
Wood-based manufacturing and reforestation
The division contributed MYR19.9 mln or 15.7% to group operating profit for 2007. Ekowood manufactures engineered solid hardwood flooring using local and imported wood species at its factory in Gopeng, Perak. The products cater to the export market, mainly to Europe (which accounted for 57% of Ekowood’s revenue for 2007). Ekowood has gained some ground in the domestic market, thanks to the robust high-end property market, and has increased domestic sales to 17% of revenue in 2007 from 9.2% in 2005. Ekowood invested about MYR20 mln in 2007 to upgrade the ESHF plant and expand the capacity to 25 mln sq. ft. from 14 mln-15 mln sq. ft.. However, we understand that the performance of the new machinery has not been up to specifications, and this will delay the commissioning to 2009.
TSH also has 100-year rights, which was awarded in 1997, to undertake forest rehabilitation, conservation and planting activities on 123,000 ha of forestry land in Ulu Tungud, Sabah. The forest plantation program involves an area of 11,000 ha and is funded by British American Tobacco (BAT MK, MYR41.00, Hold). The planting began in 2004 and to-date, about 5,000 ha have been planted. Although the return involves a long gestation period as it requires at least 10 years for the trees to mature, the project reflects TSH’s strong commitment towards the protection of the environment.
Earnings Outlook
The palm and bio-integration operations, which contributed 67.2% to group operating profit for 2007, will continue to lead the group’s performance going forward, in our opinion. We project a 26% YoY growth in net profit for 2008 to MYR119.6 mln driven by increased production from TSH’s own plantations in Indonesia and higher palm oil price. We assume a lower CPO price for 2009 and expect net profit for the year to slid 2.3% YoY to MYR116.9 mln.
The recent crude oil price slide, the high inventory of palm oil in Malaysia and the review of the biofuel target (of 10% of all transport fuel from renewable sources by 2020) by the European Union, are factors that have put downward pressure on the price of CPO of late. However, we still maintain our view that the downside will be supported by the strong underlying demand for and the tight global supplies of other edible oils, including soybean oil. We are keeping our forecasted CPO price of MYR3,200/ton for 2008 and MYR3,000/ton for 2009.
We expect the lower CPO price for 2009 to be partly made up by our projected double-digit growth in production and better margins for the refinery. The 14MW biomass power plant is expected to achieve its optimal efficiency in 2008 and contribute MYR7 mln–MYR8 mln p.a. in operating profit from the electricity sale. Profit contributions from carbon credits are not expected to be significant in 2008-2009.
We are cautious on the prospect of the wood flooring business. While the capacity increase may support volume growth, the uncertain outlook of the property markets in Europe and the U.S. and the volatility of raw material prices could affect pricing and profitability. We also believe the local highend properties have peaked, which is likely to put a brake on demand growth from the domestic market. Similarly, price inflation and weaker consumer spending may slow down the demand for cocoa products while the high prices of cocoa beans are likely to put pressure on margins.
Valuation
TSH’s share price has corrected 25.7% over the past two months, lowering the stock’s PER to a more reasonable level of 8.5x (based on projected earnings for 2008). Although the plantations in Indonesia will provide strong growth prospects for a long-term period, there are execution risks due to the local land issues, which could further delay the rate of new plantings. A less promising earnings prospect for the wood flooring division will place additional bearing on valuation, in our opinion. Thus, we prefer to be less aggressive in our valuation for the stock.
We value the stock using a PER-based sum-of-parts and add on our projected DPS to arrive at a value of MYR2.70 per share for the stock. We assign a PER of 10x to projected 2009 net EPS for the palm and biointegration operations. The assigned PER is within the range of our target multiples for medium-sized plantation stocks of 8x-10x. We accord a PER of between 6x and 7x to earnings for the wood-based and cocoa manufacturing divisions, taking into consideration the low single-digit forward multiples for Ekowood (and other downstream timber producers) and food-based manufacturers.
TSH has a long-term dividend payout policy of 30%. We project a dividend of 7.5 sen per share or a payout of about 26% for 2008 as we expect TSH to conserve part of the cash for its new plantings, palm oil mills and Ekopaper plant. At an estimated planting cost of MYR12,000/ha, TSH will need over MYR600 mln – MYR700 mln to develop the unplanted areas of 60,000 ha in Indonesia over the next 6-7 years. Net gearing is projected to increase but should remain at a comfortable level of between 40% and 50% (at group level) in 2009 from 29.3% at end-2007.
Recent Development
June 2008: TSH entered into a sale and purchase agreement to acquire a 100% interest in Martinique Cove Pte Ltd for USD5.7 mln. Martinique holds a 90% stake in PT Mitra Jaya Cemerlang, which 15,000 ha of land with izin lokasi (location permit) status in Central Kalimantan.
June 2007: TSH proposed to acquire 100% stake in Elaeis Oversea Pte Ltd for USD4.7 mln. Elaeis holds a 90% interest in PT Farinda, which owns 15,000 ha of land with izin lokasi status in East Kalimantan. The completion time for the proposed acquisition has been extended to Sep. 30, 2008.
Recommendation and Target Price History
Date/Recommendation/Target Price
New/Hold/2.70
26 July 2008
Recovery in Malaysian plantation division
27 May 2008
HOLD(unchanged)
Investment Highlights
Maintain Hold with unchanged RNAV-based target price of RM10.65/share. In spite of Kulim’s betterthan- expected 1QFY08 results and potential upside of 22% to our target price of RM10.65/share, we prefer more efficient and consistent players like IOI Corporation and Kuala Lumpur Kepong for exposure to the plantation sector.
Kulim’s 1QFY08 results exceeded our expectations and consensus estimates mainly because of a recovery in the Malaysian plantation division. Profitability of the division rebounded in 1QFY08 after being affected by floods in 1QFY07. Due to the floods, the oil palm estates in Malaysia faced lower FFB yields and higher infrastructure costs in 1QFY07.
We have raised FY08F net profit by 31% to account for higher-than-expected plantation EBIT margin. We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous assumption of 28% (FY07: 28.6%). Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 versus 24.2% in 1QFY07.
The PNG division was the key earnings driver of Kulim, accounting for more than half of group EBIT in 1QFY08. Although EBIT of the division nearly doubled YoY to RM121.7m in 1QFY08, interestingly, FFB output in PNG declined marginally by 3.7%. We attribute this to tree stress after bumper harvests in the past few years.
The quick service restaurants division also performed well, recording a 46.3% YoY increase in EBIT to RM26m in 1QFY08. The division’s improved performance is underpinned by new Pizza Hut outlets and products.
1QFY08 RESULTS ABOVE EXPECTATIONS
Kulim Bhd’s 1QFY08 results are above our expectations and consensus estimates. The group’s 1QFY08 net profit of RM98.2m accounted for 32% of our full-year forecast and 33% of consensus estimates. The discrepancy between our forecast and the actual results is due to higher-thanexpected plantation operating margin.
Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 against 24.2% in 1QFY07 and 53.9% in 4QFY07. Our assumption was 28% for FY08F (FY07: 28.6%). Kulim’s improved plantation EBIT margin in 1QFY08 can be attributed to higher CPO price and better performance from the Malaysian plantation operations.
Recovery in Malaysian plantation operations
EBIT of the Malaysian plantation division recovered from a mere RM3.2m in 1QFY07 to RM53.3m in 1QFY08 due to higher CPO price, increase in FFB yields and lower operating expenses. FFB output of the Malaysian estates expanded 34.9% YoY to 131,459 tonnes in 1QFY08 while average CPO price was 60% higher at RM2,641/tonne in 1QFY08 versus RM1,650/tonne in 1QFY07.
Recall that in 1QFY07, floods affected FFB yields of the Malaysian oil palm estates. The floods also damaged roads, which resulted in higher infrastructure and repair and maintenance expenses.
PNG division - driver of profits
The PNG division was the key driver of the group’s profits, accounting for 54% of group EBIT in 1QFY08. EBIT of the PNG division surged from RM65.5m in 1QFY07 to RM121.7m in 1QFY08. Profitability of the division was driven mainly by higher CPO prices. Average CPO price grew 63% YoY to US$954/tonne (RM2,957/tonne) in 1QFY08 compared to US$585/tonne (RM1,814/tonne) in 1QFY07.
Interestingly, FFB output of the PNG division declined 3.7% YoY to 197,218 tonnes in 1QFY08.
Profits of quick service restaurants division climbed 46.3% YoY to RM26m in 1QFY08
This is largely on the back of a 24.1% YoY expansion in turnover in 1QFY08. The higher turnover can be attributed to the opening of three new Pizza Hut outlets and new products such as the Sensasi Delight combo meals.
EBIT margin of the division improved from 17.1% in 1QFY07 to 20.2% in 1QFY08.
FY08F earnings revised up by 31%
We have revised Kulim’s FY08F net profit up by 31% to account for the better-than-expected plantation EBIT margin (please refer to Table 2). We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous forecast of 28%.
Despite the higher net profit forecast for FY08F, we are keeping our gross DPS forecast of 30 sen, which implies a yield of 3.4%.
HOLD RECOMMENDATION MAINTAINED
Our preferred exposure in the plantation sector are IOI Corporation and Kuala Lumpur Kepong Bhd. Kulim’s PNG plantation assets i.e. New Britain Palm Oil Ltd are listed on London Stock Exchange. Hence, for direct exposure to Kulim’s PNG assets, we reckon that investors should buy shares in NBPOL instead.
Going forward, we believe that the group could be facing cost pressures. Although margins for the plantation division should remain intact due to high CPO prices, the quick service restaurants division could face an erosion in operating margin because of increased material and overhead costs.
Kulim’s dividend yield of 3.4% for FY08F is in line with sector average while FY08F return on equity of 12.9% is decent enough.
HOLD(unchanged)
Investment Highlights
Maintain Hold with unchanged RNAV-based target price of RM10.65/share. In spite of Kulim’s betterthan- expected 1QFY08 results and potential upside of 22% to our target price of RM10.65/share, we prefer more efficient and consistent players like IOI Corporation and Kuala Lumpur Kepong for exposure to the plantation sector.
Kulim’s 1QFY08 results exceeded our expectations and consensus estimates mainly because of a recovery in the Malaysian plantation division. Profitability of the division rebounded in 1QFY08 after being affected by floods in 1QFY07. Due to the floods, the oil palm estates in Malaysia faced lower FFB yields and higher infrastructure costs in 1QFY07.
We have raised FY08F net profit by 31% to account for higher-than-expected plantation EBIT margin. We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous assumption of 28% (FY07: 28.6%). Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 versus 24.2% in 1QFY07.
The PNG division was the key earnings driver of Kulim, accounting for more than half of group EBIT in 1QFY08. Although EBIT of the division nearly doubled YoY to RM121.7m in 1QFY08, interestingly, FFB output in PNG declined marginally by 3.7%. We attribute this to tree stress after bumper harvests in the past few years.
The quick service restaurants division also performed well, recording a 46.3% YoY increase in EBIT to RM26m in 1QFY08. The division’s improved performance is underpinned by new Pizza Hut outlets and products.
1QFY08 RESULTS ABOVE EXPECTATIONS
Kulim Bhd’s 1QFY08 results are above our expectations and consensus estimates. The group’s 1QFY08 net profit of RM98.2m accounted for 32% of our full-year forecast and 33% of consensus estimates. The discrepancy between our forecast and the actual results is due to higher-thanexpected plantation operating margin.
Kulim’s plantation division recorded an EBIT margin of 45.8% in 1QFY08 against 24.2% in 1QFY07 and 53.9% in 4QFY07. Our assumption was 28% for FY08F (FY07: 28.6%). Kulim’s improved plantation EBIT margin in 1QFY08 can be attributed to higher CPO price and better performance from the Malaysian plantation operations.
Recovery in Malaysian plantation operations
EBIT of the Malaysian plantation division recovered from a mere RM3.2m in 1QFY07 to RM53.3m in 1QFY08 due to higher CPO price, increase in FFB yields and lower operating expenses. FFB output of the Malaysian estates expanded 34.9% YoY to 131,459 tonnes in 1QFY08 while average CPO price was 60% higher at RM2,641/tonne in 1QFY08 versus RM1,650/tonne in 1QFY07.
Recall that in 1QFY07, floods affected FFB yields of the Malaysian oil palm estates. The floods also damaged roads, which resulted in higher infrastructure and repair and maintenance expenses.
PNG division - driver of profits
The PNG division was the key driver of the group’s profits, accounting for 54% of group EBIT in 1QFY08. EBIT of the PNG division surged from RM65.5m in 1QFY07 to RM121.7m in 1QFY08. Profitability of the division was driven mainly by higher CPO prices. Average CPO price grew 63% YoY to US$954/tonne (RM2,957/tonne) in 1QFY08 compared to US$585/tonne (RM1,814/tonne) in 1QFY07.
Interestingly, FFB output of the PNG division declined 3.7% YoY to 197,218 tonnes in 1QFY08.
Profits of quick service restaurants division climbed 46.3% YoY to RM26m in 1QFY08
This is largely on the back of a 24.1% YoY expansion in turnover in 1QFY08. The higher turnover can be attributed to the opening of three new Pizza Hut outlets and new products such as the Sensasi Delight combo meals.
EBIT margin of the division improved from 17.1% in 1QFY07 to 20.2% in 1QFY08.
FY08F earnings revised up by 31%
We have revised Kulim’s FY08F net profit up by 31% to account for the better-than-expected plantation EBIT margin (please refer to Table 2). We are now assuming an EBIT margin of 38% for the plantation division in FY08F against our previous forecast of 28%.
Despite the higher net profit forecast for FY08F, we are keeping our gross DPS forecast of 30 sen, which implies a yield of 3.4%.
HOLD RECOMMENDATION MAINTAINED
Our preferred exposure in the plantation sector are IOI Corporation and Kuala Lumpur Kepong Bhd. Kulim’s PNG plantation assets i.e. New Britain Palm Oil Ltd are listed on London Stock Exchange. Hence, for direct exposure to Kulim’s PNG assets, we reckon that investors should buy shares in NBPOL instead.
Going forward, we believe that the group could be facing cost pressures. Although margins for the plantation division should remain intact due to high CPO prices, the quick service restaurants division could face an erosion in operating margin because of increased material and overhead costs.
Kulim’s dividend yield of 3.4% for FY08F is in line with sector average while FY08F return on equity of 12.9% is decent enough.
Receives RM33m Modipalm contract
BUY
RM4.20
Target Price: RM5.60
13 June 2008
ambg.com.my
YE to Dec FY07 FY08F FY09F FY10F
EPS (sen) 32.8 47.0 64.0 63.8
PE (x) 12.8 8.9 6.6 6.6
CB Industrial Product Holding Bhd (“CBIP”) has received a Letter of Award from PT Astra Agro Lestari for the construction of a 45 tonnes/hour Modipalm mill. The contract value is RM32.6m. This is the third Modipalm mill contract that PT Astra Agro Lestari has awarded to CBIP.
Also, this is the second contract that CBIP has secured this year. So far this year, CBIP has received RM60.3m worth of contracts. The other contract was awarded by Lembaga Tabung Haji (“LTH”) in April. LTH’s contract was in respect of the construction of a kernel crushing and biomass plant.
We would not be revising our earnings estimates as we have already assumed that CBIP would secure RM250m worth of contracts this year (FY07: RM276m). Despite this, it looks like the contract flow for CBIP is slowing and we would be visiting the group soon to get updates.
A concern is rising steel costs. Since the start of the year, steel costs have increased by 93%. We have assumed that the EBITDA margin for CBIP’s construction division would decline from 17% in FY07 to 13% in FY08F.
Despite potentially lower construction earnings, CBIP is still expected to record double-digit profit growth this year due to stronger plantation earnings. We estimate the plantation division to account for 37% of group EBITDA in FY08F. This should rise to 66% of group EBITDA in FY09F.
For now, we maintain Buy on CBIP. However, we would be reviewing our target price and earnings forecast for CBIP again due to slowing contract flows. Our target price is based on FY08F PE of 12x.
RM4.20
Target Price: RM5.60
13 June 2008
ambg.com.my
YE to Dec FY07 FY08F FY09F FY10F
EPS (sen) 32.8 47.0 64.0 63.8
PE (x) 12.8 8.9 6.6 6.6
CB Industrial Product Holding Bhd (“CBIP”) has received a Letter of Award from PT Astra Agro Lestari for the construction of a 45 tonnes/hour Modipalm mill. The contract value is RM32.6m. This is the third Modipalm mill contract that PT Astra Agro Lestari has awarded to CBIP.
Also, this is the second contract that CBIP has secured this year. So far this year, CBIP has received RM60.3m worth of contracts. The other contract was awarded by Lembaga Tabung Haji (“LTH”) in April. LTH’s contract was in respect of the construction of a kernel crushing and biomass plant.
We would not be revising our earnings estimates as we have already assumed that CBIP would secure RM250m worth of contracts this year (FY07: RM276m). Despite this, it looks like the contract flow for CBIP is slowing and we would be visiting the group soon to get updates.
A concern is rising steel costs. Since the start of the year, steel costs have increased by 93%. We have assumed that the EBITDA margin for CBIP’s construction division would decline from 17% in FY07 to 13% in FY08F.
Despite potentially lower construction earnings, CBIP is still expected to record double-digit profit growth this year due to stronger plantation earnings. We estimate the plantation division to account for 37% of group EBITDA in FY08F. This should rise to 66% of group EBITDA in FY09F.
For now, we maintain Buy on CBIP. However, we would be reviewing our target price and earnings forecast for CBIP again due to slowing contract flows. Our target price is based on FY08F PE of 12x.
25 July 2008
Plantation Sector - Second leg of de-rating from supply imbalance Underweight
看报告只须看"经济和实况" ，"预测和推荐"只能信一半。
如果分析机构已经闯出名堂了，他们会预留空间，以让日后有东西写。激进的分析机构(常是默默无闻的)，会比较斩钉截铁，这种报告比较能告诉你一些事实，但也不会傻到告诉你全部，例:闹了4个月的阿根廷政局。
根据综合报导，cpo的下调会落在RM2500。
Sector update
UNDERWEIGHT (Downgraded)
25 July 2008
ambg.com.my
Investment Highlights
We are downgrading the plantation sector from OVERWEIGHT to UNDERWEIGHT after a few company visits. Notwithstanding the recent sell-offs, we believe that there is still a further downside to share prices. In our opinion, the first leg of de-rating was largely sentiment-driven, triggered by the correction in oil price.
More disconcertingly, we caution that the second-leg of de-rating will likely be more fundamentally-driven: a growing mismatch of CPO (crude palm oil) supply and demand as production may surge moving into 2009. Early signs of a supply imbalance are already reflected in the inventory levels, which rose to a seven-year high of 2 million tonnes as at June 2008.
Our company visits revealed that consensus is mixed, with bullish undertones now being replaced with creeping concerns over fast-rising supply. CPO production in Indonesia is expected to increase by a significant 13% from 18.8 million tonnes in 2008 to 21.3 million tonnes in 2009. This represents the fastest expansion in CPO production in the past two years (average 8% p.a.), with exponential growth coming from a step-up in mature areas (from the massive replanting programs in 2004-2005) and enhancements in FFB (fresh fruit bunches) yields.
Similarly, in Malaysia, CPO production is expected to rise by 11% from 16 million tonnes in 2008 to 18 million tonnes in 2009. This compares to an average annual increase of only 4% in the past four years. To be sure, the highest export growth for Malaysia in the past four years was only 7% p.a. in 2005 and 2006.
Even in the face of slowing demand from China, India and Europe, we do not think that demand growth (average growth rate of 3% in the past four years) will expand fast enough to absorb the steep increase in supply. Furthermore, actual demand may even fall short of expectations given rising regulatory risks on biofuel in the mature economies. CPO demand may be hit at some point in the face of elevated inflationary pressures in Asia. Our discussion with a dominant industry player indicated that China is buying “just enough” palm oil instead of the previous practice of stocking up inventory.
Biofuel policies in USA and Europe are not as positive as before. In the United States, an increasing number of states are seeking waiver from the energy law, which mandates 15 billion gallons of ethanol in fuel supply annually by 2015. The Environmental Protection Agency (EPA) is now considering a request from the state of Texas and would make a decision by August. We reckon that if the EPA approves Texas request of a waiver, then other states in USA would follow suit.
In Europe, two major developments are taking place in the biofuel industry. First, a keymaker has proposed to reduce the 2020 biofuel target from 10% to 4%. This has an impact on vegetable oil prices as approximately 67% of biodiesel produced in United States are exported to Europe while 30% of corn and 13% of soybean are used as biofuel feedstock in the country.
Second, the European Commission is investigating if the United States has been unfairly exporting subsidised biodiesel to Europe at the expense of the European biodiesel producers. The commission will complete its investigation by June 2009. In the meantime, the commission is allowed to impose measures against biodiesel from USA although there has been none yet. But if it decides to impose duties on exports of US biodiesel to Europe, there would be negative effects on the US biodiesel industry and vegetable oil prices.
Taken together, we expect inventory levels to remain at a high level of 2.2 million tonnes next year and continued deterioration in the stock usage ratio (inventory levels expressed as at multiple of exports) as supply overwhelms demand. This means that the CPO pricing cycle is coming to an end. We have cut our CPO price assumptions from RM3,500/tonne to RM3,000/tonne in 2009 and RM2,800/tonne in 2010. Against this backdrop, we have slashed our FY09F earnings estimates by 13%-42%. Based on our revised earnings estimates, we expect earnings of the plantation companies to peak in 2008 and decline by 15% in 2009 and 2% in 2010. We have also trimmed our dividend assumptions.
We are downgrading IOI Corporation and Sime Darby to HOLD. We recommend to SELL the rest of the stocks under our coverage. In spite of Wilmar’s integrated agribusiness, we have a SELL recommendation as a slowdown in China is expected to affect not only the group’s plantation division but also the sales volume and margins of its merchandising and processing division.
DOWNGRADE SECTOR TO UNDERWEIGHT
The current CPO (crude palm oil) price cycle started in 2H2005. Since then, the KL Plantation Index surged 210% to a high of 8,823 points in January this year compared to KLCI’s (Kuala Lumpur Composite Index) rise of 66%. Plantation stocks like IOI Corporation (IOI) and KL Kepong (KLK) more than doubled during that period.
Barring unforeseen weather circumstances we believe that the good run for CPO price and plantation stocks has ended. Due to the reasons listed below, we are downgrading
the plantation sector from OVERWEIGHT to UNDERWEIGHT. The reasons for our sector downgrade are:-
1. Slowing demand from China coupled with higher-than-expected palm oil output from Indonesia;
2. European Union’s (EU) proposed reduction in the use of biofuel in transportation fuels from 10% to 4% by 2020;
3. Inflation to reduce demand from downstream products;
4. Impact from the Midwest floods in US on soybean would not be as negative-as-expected;
5. More states in USA are softening their stance on biofuel targets as it has been blamed as the cause of high food prices;
6. EU’s backlash against US biodiesel; and
7. Macro factors - A hike in interest rate in USA would soften the demand for commodities such as crude oil. The hike will also cause a stronger US dollar, which
would result in the switching of assets from crude oil to US dollar.
Lower crude oil price would exert downward pressure on CPO price. As these macro factors are more economics-based instead of equity, we would not be elaborating them in this report.
2009F CPO PRICE ASSUMPTION REVISED TO RM3,000/TONNE FROM RM3,500/TONNE
We are revising our average CPO price assumption for 2009F from RM3,500/tonne to RM3,000/tonne. For 2010F, we are assuming an average CPO price of RM2,800/tonne versus RM3,500/tonne previously.
Our 14% downward revision in CPO price assumption for 2009F has resulted in the earnings of the plantation companies under our coverage being lowered by 13%-42%. Our earnings revisions account for both the lower CPO price and operating margin.
Among the companies our coverage, the most sensitive to changes in CPO price are the pure plantation companies such as Sarawak Oil Palms and Tradewinds Plantation. For every RM100/tonne change in the price of CPO, FY09F net profits of these companies declines about 4%- 6% (See Table 2).
Integrated companies such as IOI and Wilmar are less vulnerable to the volatilities of the CPO price cycle. We estimate that for every RM100/tonne downward revision in
CPO price, the net profits of these companies would decrease by 2%-3%.
HOW LOW CAN SHARE PRICES GO?
It is difficult to gauge how low share prices can go. Since reaching their highs early this year, share prices of plantation companies under our coverage have fallen 10%-41%. Based on historical price cycles, there is a possibility that share prices of plantation companies can weaken further (See Table 3).
During the 1994/95 CPO price downturn, share prices of the plantation companies in our stock universe declined as much as 52% (See Table 3). In 1999/2000, the fall in share prices ranged between 33% to 72%.
The magnitude of the fall in share prices in 2004 was smaller compared to other cycles and the trough period was shorter than the rest. Share prices of the plantation companies under our coverage shrank by only 19% to 31% during the 2004 trough period (See Table 3). By the end of the year, they had already recovered from their lows.
Stock recommendations
We are now assuming a lower PE of 12x-13x on CY09F earnings to arrive at the target prices of the big-cap plantation companies such as IOI, KLK and Wilmar. For the smaller companies, we have assumed a PE of 6x-8x. (See Charts 5-8 for PE bands of IOI, KLK, Kulim and Sarawak Oil Palms).
We are downgrading our recommendation on all the stocks under our coverage from BUY to SELL except for Sime Darby and IOI.
Although we have a SELL recommendation on TH Plantations, investors looking for dividend yield can consider the stock. TH Plantations’ attractive dividend yield of 6%-7% is underpinned by its official policy of a 50% payout from annual profit.
In spite of Wilmar’s integrated agribusiness, we recommend to SELL the stock as it is the most exposed to a slowdown in the Chinese economy.
WHY DOWNGRADE?
HIGHER-THAN-EXPECTED PALM OIL SUPPLY FROM INDONESIA IN 2009F
Output growth of 13% in 2009F
We believe that Indonesia will record a bumper harvest next year on the back of higher mature areas and more trees entering the productive age of seven to 15 years.
Output growth is expected to come from state-owned companies and smallholders. Also, the major listed plantation companies in both Malaysia and Indonesia are seen to account for nearly 30% of the country’s output (see Table 6).
Oil World, a monthly publication, has projected Indonesia’s CPO production to expand 13.3% to 21.3 million tonnes in 2009F from an estimated 18.8 million tonnes in 2008F (See Chart 2).
Based on our estimates, about one-half of the production growth forecast by Oil World would come from the regional plantation companies. The CPO output of the major listed plantation companies are expected to increase 6% to 5.8 million tonnes next year underpinned by a 3% increase in mature areas and a 4% improvement in FFB (fresh fruit bunch) yields.
Enhancements in FFB yield are envisaged to be partly driven by the favourable age profile of trees. For instance, approximately 84% of Golden Agri-Resources’ mature trees were in the prime years of seven to 18 as at end-2007 while 60% of Astra Agro Lestari’s mature trees were between 10 to 14 years as at January 2008.
Among the regional plantation companies, Bakrie Sumatra is expected to record the highest increase in CPO production in 2009F on the back of a 5% growth in mature areas and 11% improvement in FFB yield (see Tables 5 and 6). Following Bakrie Sumatra is Sampoerna Agro with a 14% climb in CPO output in 2009F (See Tables 5 and 6).
Long-term output growth could even be higher due to aggressive planting plans by companies
In five to ten years’ time, we believe that there is strong likelihood that palm oil production in Indonesia would grow at a double-digit rate per annum. This is due to aggressive planting plans not only by Indonesia-based companies but also by Malaysia and Singapore-based ones like Wilmar International and KLK.
At the minimum, these plantation companies are expected to cultivate 10,000ha of oil palm areas annually each (See Table 7). The most aggressive is Wilmar, which intends to plant up to 40,000ha of oil palm p.a. (See Table 7).
Based on the companies under our coverage, at least 100,000ha of landbank would be cultivated by the major companies in Indonesia every year. This is bigger than Kulim Bhd, which has approximately 82,906ha of plantation landbank but close to the size of Tradewinds Plantation Bhd, which has 129,332ha of landbank.
Assuming a conservative FFB yield of 18 tonnes/ha and oil extraction rate (OER) of 19%, then the potential CPO output from these new areas would be 342,000 tonnes/ year. This is 2% of Indonesia’s 2007 and Malaysia’s 2008F output, each.
As for Malaysia, barring unforeseen weather circumstances, industry expert, Mr MR Chandran has forecast the country’s output to expand 11% to 18 million tonnes in 2009F from 16.2 million tonnes estimated by MPOB (Malaysian Palm Oil Board) for 2008F.
Output growth is expected to come from new planting areas in Sarawak and enhancements in FFB yields in Sabah and Sarawak.
Sabah recorded a FFB yield of 23 tonnes/ha and OER of 21.3% in 2007 while Sarawak’s FFB yield and OER were 15.7 tonnes/ha and 21.0% respectively. There were approximately 1.1 million hectares of mature areas in Sabah and 500,000 hectares in Sarawak in 2006.
DEMAND FROM MAJOR IMPORTERS NOT CATCHING UP WITH SUPPLY
Although palm oil exports have been expanding YoY in the past six months, we believe that going forward, demand growth may not be able to catch up with supply. We reckon that palm oil demand from China and Europe will slow down. If the US biodiesel industry is affected by the developments in Europe, then demand for palm oil from the United States would also be affected.
We are of the view that Malaysian palm oil exports to China may reach its peak this year before tapering off next year. This is due to a few reasons.
First, high food prices are prompting consumers and manufacturers to cut down on spending. Instead of stocking up, they are now buying only according to their needs.
According to an industry player with sizeable operations in China, demand for palm oil in China has been growing at a slower rate in the past few months due to high prices. Instead of buying vegetable oil in large volumes, importers or manufacturers are now purchasing “just enough” for customers.
a:就是因为他们知道物价会在下个月下跌，所以才削减购买。
Second, we believe that palm oil exports to China in the past six months were partly driven by preparations for the 2008 Beijing Olympics Games. It is likely that demand would start to soften after the Olympics end in September 2008.
a:奥运年刺激需求上涨？
Finally, a significant 30% of palm oil are used in the industrial segment of oleochemical in China (See Chart 1). Therefore, if demand from this segment weakens due to uncertainties in the global economy, then there would be a fall in palm oil exports to China.
In 2007, Malaysian palm oil exports to China amounted to 3.8 million tonnes. Hence, a 10% reduction in demand would translate into 400,000 tonnes. In comparison, the country’s 2009F palm oil output is forecast to grow 11% to 18 million tonnes from 16.2 million tonnes in 2008F.
Palm oil exports to China rose 10% YoY to 1.8 million tonnes in 1H2008. We think that palm oil export growth to China would be between 7% to 10% this year and 5% to 7% for 2009F (2007: 7%).
Malaysia’s palm oil exports to China have climbed steadily since 1999 (See Chart 3). The highest growth of 21% was achieved in 2006 when China abolished the palm oil import quota under the World Trade Organisation guidelines. China took over from India as the largest importer of Malaysian palm oil in 2002.
As for Europe, we expect palm oil exports to continue to soften on two counts. First, the tax imposed on B100 biodiesel in Germany will continue to affect consumer
demand for biodiesel.
Second, a proposed reduction in European Union’s (EU) biofuel target from 10% to 4% by 2010F would affect demand and prices of vegetable oil. We will elaborate in the next section.
Last year, Malaysian palm oil exports to EU declined 20% to 2 million tonnes. In 1H2008, EU’s imports of palm oil from Malaysia fell 19% YoY to 900,000 tonnes.
PROPOSED REDUCTION IN EU’S 2020 BIOFUEL TARGET FROM 10% TO 4%
A recent World Bank report blamed the rise in global food prices to biofuel. It was estimated that 75% of the increase in global food prices was due to biofuel.
Following that report, in early July key officials of the EU began to distance themselves from the organisation’s target of using biofuel in 10% of transportation fuels by 2020.
Reuters quoted an EU lawmaker as saying that he has broad parliamentary backing to propose changing EU’s biofuel target to only 4% from 10%.
According to an EU statement, there is no official policy change and the Commission is still sticking to its original target of 10%. The Commission also said in early July that the 10% target does not include only biofuels but also renewable sources such as hydrogen or electricity power.
Although the 4% or 10% biofuel target is only a long-term target, we believe that it would have an impact on vegetable oil prices as blenders in EU would no longer be driven to produce as much biofuel as before.
source:USDA
Lower biodiesel demand from Europe will affect the biodiesel industry in the United States. According to various news reports, approximately 300 million gallons or 67% of 450 million gallons of biodiesel produced in USA were exported to EU last year. USA’s biodiesel exports represented 15% to 20% of the EU biodiesel market.
Additionally, as about 13% of soybean and 30% of corn in USA are expected to be used as feedstock to produce biofuel in 2008/09, a collapse in the US biodiesel industry would exert downward pressure on vegetable oil prices.
Direct impact on CPO price would also come in the form of lower imports of palm oil by EU. About half of EU’s biodiesel are produced using rapeseed oil. If biodiesel production were to decrease, then there would not be any shortage of rapeseed for the food segment. This would reduce palm oil imports by the EU.
Netherlands, which is the vegetable oil processing centre of Europe, has been importing less palm oil since last year. In 2007, palm oil exports to Netherlands fell 13% YoY to 1.5 million tonnes and 31% YoY to 500,000 tonnes in 1H2008 (See Chart 2).
INFLATION TO REDUCE DEMAND FROM THE DOWNSTREAM SEGMENT
Based on Indofood Agri-Resources’ 1QFY08 results, demand for downstream products such as cooking oil has been healthy in spite of higher selling prices. Going forward, we expect demand from this segment to remain positive as people still need to eat.
However, there could be weaker demand from the industrial segment of the downstream chain e.g. oleochemicals. Apart from food and beverage, fatty acids are used in many other industries such as electronic, paints and coating and plastics. Due to the current economic downturn, demand from these industries could falter.
Another reason for slower demand is the high prices of end-products. Oleochemical companies have been passing on rising feedstock costs in the form of higher selling prices.
Feedstock costs such as palm kernel oil or refined palm stearin have been climbing due to an increase in regional oleochemical production capacity and CPO price. Prices of palm kernel oil and refined palm stearin have risen by 50% and 29% respectively in the past 12 months.
According to an industry player early this year, global supply and demand for fatty acids are approximately 9.5 million tonnes/year and 6 million tonnes/year respectively. Out of the 9.5 million tonnes/year of world supply, about 6 million tonnes/year are from Asia. In China, nearly 30% of palm oil imported by the country are used in the oleochemical segment.
In Malaysia, according to MPOB total oleochemical production amounted to 2.6 million tonnes in 2007. To produce 0.92 tonnes of fatty acids, approximately one tonne of palm kernel oil is needed.
Hence, based only on Malaysia’s 2007 oleochemical production and disregarding demand from other countries, if there is a 10% decline in demand from the fatty acids segment, this would reduce CPO demand by 300,000 tonnes. This is about 2% of Malaysia’s 2008F estimated production of 16.2 million tonnes.
a:cpo也能取出fatty acid
IMPACT FROM MIDWEST FLOODS NOT AS SEVERE-AS-EXPECTED
Recent reports indicate that in spite of receding waters in the Midwest and minimal possibility of farmers replanting soybean, soybean output in the United States are still projected to increase in 2008/09F.
In its July report, USDA (United States Department of Agriculture) revised its soybean projections downwards to account for effects of the Midwest floods. The USDA trimmed its estimates for soybean harvested areas from 73.8 million acres to 72.1 million acres (See Table 8).
Forecast of soybean yield was also revised downwards, resulting in 2008/09F soybean production being lowered by 3.3% or 105 million bushels, to 3,000 million bushels. The projection of soybean ending stocks was revised downwards by 20% from 175 million bushels to 140 million bushels for 2008/09F.
Despite this, soybean output and ending stocks are still anticipated to rise in 2008/09F. The USDA forecasts soybean production to expand 16% to 3,000 million bushels in 2008/09F, 3% lower than its estimate of 3,105 million bushels reported in June. Ending stocks are expected to climb 12% to 140 million bushels in 2008/09F versus June’s forecast of 175 million bushels.
Globally, soybean production is envisaged to rise 9% to 237.8 million tonnes in 2008/09F while ending stocks are expected to remain flat at 48.9 million tonnes due to smaller beginning stocks in the year. Interestingly, usage or demand for soybean is projected to inch up only 2% in 2008/09F.
US LAWMAKERS SOFTENING BIOFUEL STANCE
Currently, the US energy law (signed in 2007) mandates 15 billion gallons of ethanol in fuel supply annually by 2015 and that 36 billion gallons a year of renewable energy be blended into gasoline by 2022.
However, an increasing number of US senators and governors have been calling for a softer stance in the country’s biofuel policy due to rising food prices.
The first was Texas, which requested for an exemption from the US energy law in April this year. Texas Governor Rick Perry is seeking a year-long waiver of 50% of the mandate. Connecticut Governor Jodi Rell in early May asked that the energy requirements be put on hold.
A US Senator in Texas said that she would soon be proposing a bill to freeze the new national biofuel mandate. In Missouri, some lawmakers were unsuccessfully pushing for a cancellation of the state’s ethanol mandate in April. Missouri law mandates all gasoline contain 10% ethanol.
Going forward, the risk is that the current energy law would be frozen or more states in the US would ask for a waiver against the energy law. This will result in falling demand for soybean and corn.
Presently, the waiver request by the Texas Governor is being considered by USA’s Environmental Protection Agency (EPA). A decision will be made by August this year. According to a CBOT (Chicago Board of Trade) report in May, the EPA has the power to modify the renewable fuels requirement under a 2005 law that mandates the production of 7.5 billion gallons of biofuel a year by 2012 versus the current mandate of 9 billion gallons of biofuel for 2008 alone.
We believe that if the EPA approves the request of the Texas state to reduce its biofuel target, then other states would follow suit. This would reduce demand for corn and soybean oil.
According to the latest USDA projections, nearly 30% of corn supply will be used as feedstock to make ethanol in 2008/09. In 2007/08, the percentage of corn used in the ethanol industry was about 20%.
As for soybean oil, approximately 13% of the vegetable oil supplies would be used by the biodiesel industry in 2008/ 09F compared to 11% in 2007/08.
US LAWMAKERS TIGHTENING STANCE ON CRUDE OIL SPECULATION
Recently, the US Senate voted to consider a bill that would curb speculation in the oil markets. This bill would require the Commodity Futures Trading Commission (CFTC) to set limits on trading in oil markets by investors and speculators and close a loophole that allows speculators trading on the London oil market to escape scrutiny by US regulators.
Although according to news reports, it would be difficult to secure bipartisan approval to pass the bill, we believe that the development is an indication of increased scrutiny on the energy markets.
So far, there has been no mention on limits on agricultural commodity futures yet. Recall that in June this year, the CFTC had already announced disclosure-based initiatives to address concerns in the commodity futures market. Some of the initiatives included proposals to routinely require more detailed information from index traders and revisions to improve effectiveness of of agricultural trade options.
EU’S BACKLASH AGAINST US BIODIESEL
In April 2008, the European Biodiesel Board (EBB) launched a legal complaint to the European Commission against unfair subsidised biodiesel exports from the United States.
According to EBB, EU biofuel producers have been languishing due to the cheaper biofuel exports from USA. The EBB urged the European Commission to initiate an anti-dumping and anti-subsidy investigation with a view to impose counter measures against US biodiesel.
Currently, the European Commission is still conducting investigations as to whether there has been unfair trade practices. The investigation is only scheduled to be completed in June 2009. However, the Commission may impose provisional measures within a nine months period from the date of the complaint i.e. June 2008.
It would be detrimental to the US biodiesel industry if the EU were to ban or impose measures restricting US biodiesel. This is because more than one-half of the biodiesel produced in USA are exported to EU. In addition, a significant proportion of corn and soybean are used as feedstock to manufacture biofuel.
A silver lining is that US has reduced its subsidy for ethanol from 51 US cents/gallon or US$155/tonne to 46 US cents/gallon or US$140/tonne. Hence, this should help make EU biodiesel slightly more competitive against US biofuel and alleviate some of the complaints.
The flipside is that the reduction in subsidy is only for ethanol and not biodiesel i.e. biofuel made from soybean. Most of the biofuel exported from the United States to the EU are biodiesel.
CONCLUSION
In summary, there has been increasing backlash against biodiesel as it is said to be the main cause of food inflation. One of the drivers of CPO price was supportive EU and US biofuel policies. Therefore, if these policies were reversed, there would be a downward pressure on CPO prices.
While there is more downside risk for CPO prices, the upside is increasingly limited, barring unpredictable weather. Hence, we are downgrading the plantation sector to UNDERWEIGHT from OVERWEIGHT.
如果分析机构已经闯出名堂了，他们会预留空间，以让日后有东西写。激进的分析机构(常是默默无闻的)，会比较斩钉截铁，这种报告比较能告诉你一些事实，但也不会傻到告诉你全部，例:闹了4个月的阿根廷政局。
根据综合报导，cpo的下调会落在RM2500。
Sector update
UNDERWEIGHT (Downgraded)
25 July 2008
ambg.com.my
Investment Highlights
We are downgrading the plantation sector from OVERWEIGHT to UNDERWEIGHT after a few company visits. Notwithstanding the recent sell-offs, we believe that there is still a further downside to share prices. In our opinion, the first leg of de-rating was largely sentiment-driven, triggered by the correction in oil price.
More disconcertingly, we caution that the second-leg of de-rating will likely be more fundamentally-driven: a growing mismatch of CPO (crude palm oil) supply and demand as production may surge moving into 2009. Early signs of a supply imbalance are already reflected in the inventory levels, which rose to a seven-year high of 2 million tonnes as at June 2008.
Our company visits revealed that consensus is mixed, with bullish undertones now being replaced with creeping concerns over fast-rising supply. CPO production in Indonesia is expected to increase by a significant 13% from 18.8 million tonnes in 2008 to 21.3 million tonnes in 2009. This represents the fastest expansion in CPO production in the past two years (average 8% p.a.), with exponential growth coming from a step-up in mature areas (from the massive replanting programs in 2004-2005) and enhancements in FFB (fresh fruit bunches) yields.
Similarly, in Malaysia, CPO production is expected to rise by 11% from 16 million tonnes in 2008 to 18 million tonnes in 2009. This compares to an average annual increase of only 4% in the past four years. To be sure, the highest export growth for Malaysia in the past four years was only 7% p.a. in 2005 and 2006.
Even in the face of slowing demand from China, India and Europe, we do not think that demand growth (average growth rate of 3% in the past four years) will expand fast enough to absorb the steep increase in supply. Furthermore, actual demand may even fall short of expectations given rising regulatory risks on biofuel in the mature economies. CPO demand may be hit at some point in the face of elevated inflationary pressures in Asia. Our discussion with a dominant industry player indicated that China is buying “just enough” palm oil instead of the previous practice of stocking up inventory.
Biofuel policies in USA and Europe are not as positive as before. In the United States, an increasing number of states are seeking waiver from the energy law, which mandates 15 billion gallons of ethanol in fuel supply annually by 2015. The Environmental Protection Agency (EPA) is now considering a request from the state of Texas and would make a decision by August. We reckon that if the EPA approves Texas request of a waiver, then other states in USA would follow suit.
In Europe, two major developments are taking place in the biofuel industry. First, a keymaker has proposed to reduce the 2020 biofuel target from 10% to 4%. This has an impact on vegetable oil prices as approximately 67% of biodiesel produced in United States are exported to Europe while 30% of corn and 13% of soybean are used as biofuel feedstock in the country.
Second, the European Commission is investigating if the United States has been unfairly exporting subsidised biodiesel to Europe at the expense of the European biodiesel producers. The commission will complete its investigation by June 2009. In the meantime, the commission is allowed to impose measures against biodiesel from USA although there has been none yet. But if it decides to impose duties on exports of US biodiesel to Europe, there would be negative effects on the US biodiesel industry and vegetable oil prices.
Taken together, we expect inventory levels to remain at a high level of 2.2 million tonnes next year and continued deterioration in the stock usage ratio (inventory levels expressed as at multiple of exports) as supply overwhelms demand. This means that the CPO pricing cycle is coming to an end. We have cut our CPO price assumptions from RM3,500/tonne to RM3,000/tonne in 2009 and RM2,800/tonne in 2010. Against this backdrop, we have slashed our FY09F earnings estimates by 13%-42%. Based on our revised earnings estimates, we expect earnings of the plantation companies to peak in 2008 and decline by 15% in 2009 and 2% in 2010. We have also trimmed our dividend assumptions.
We are downgrading IOI Corporation and Sime Darby to HOLD. We recommend to SELL the rest of the stocks under our coverage. In spite of Wilmar’s integrated agribusiness, we have a SELL recommendation as a slowdown in China is expected to affect not only the group’s plantation division but also the sales volume and margins of its merchandising and processing division.
DOWNGRADE SECTOR TO UNDERWEIGHT
The current CPO (crude palm oil) price cycle started in 2H2005. Since then, the KL Plantation Index surged 210% to a high of 8,823 points in January this year compared to KLCI’s (Kuala Lumpur Composite Index) rise of 66%. Plantation stocks like IOI Corporation (IOI) and KL Kepong (KLK) more than doubled during that period.
Barring unforeseen weather circumstances we believe that the good run for CPO price and plantation stocks has ended. Due to the reasons listed below, we are downgrading
the plantation sector from OVERWEIGHT to UNDERWEIGHT. The reasons for our sector downgrade are:-
1. Slowing demand from China coupled with higher-than-expected palm oil output from Indonesia;
2. European Union’s (EU) proposed reduction in the use of biofuel in transportation fuels from 10% to 4% by 2020;
3. Inflation to reduce demand from downstream products;
4. Impact from the Midwest floods in US on soybean would not be as negative-as-expected;
5. More states in USA are softening their stance on biofuel targets as it has been blamed as the cause of high food prices;
6. EU’s backlash against US biodiesel; and
7. Macro factors - A hike in interest rate in USA would soften the demand for commodities such as crude oil. The hike will also cause a stronger US dollar, which
would result in the switching of assets from crude oil to US dollar.
Lower crude oil price would exert downward pressure on CPO price. As these macro factors are more economics-based instead of equity, we would not be elaborating them in this report.
2009F CPO PRICE ASSUMPTION REVISED TO RM3,000/TONNE FROM RM3,500/TONNE
We are revising our average CPO price assumption for 2009F from RM3,500/tonne to RM3,000/tonne. For 2010F, we are assuming an average CPO price of RM2,800/tonne versus RM3,500/tonne previously.
Our 14% downward revision in CPO price assumption for 2009F has resulted in the earnings of the plantation companies under our coverage being lowered by 13%-42%. Our earnings revisions account for both the lower CPO price and operating margin.
Among the companies our coverage, the most sensitive to changes in CPO price are the pure plantation companies such as Sarawak Oil Palms and Tradewinds Plantation. For every RM100/tonne change in the price of CPO, FY09F net profits of these companies declines about 4%- 6% (See Table 2).
Integrated companies such as IOI and Wilmar are less vulnerable to the volatilities of the CPO price cycle. We estimate that for every RM100/tonne downward revision in
CPO price, the net profits of these companies would decrease by 2%-3%.
HOW LOW CAN SHARE PRICES GO?
It is difficult to gauge how low share prices can go. Since reaching their highs early this year, share prices of plantation companies under our coverage have fallen 10%-41%. Based on historical price cycles, there is a possibility that share prices of plantation companies can weaken further (See Table 3).
During the 1994/95 CPO price downturn, share prices of the plantation companies in our stock universe declined as much as 52% (See Table 3). In 1999/2000, the fall in share prices ranged between 33% to 72%.
The magnitude of the fall in share prices in 2004 was smaller compared to other cycles and the trough period was shorter than the rest. Share prices of the plantation companies under our coverage shrank by only 19% to 31% during the 2004 trough period (See Table 3). By the end of the year, they had already recovered from their lows.
Stock recommendations
We are now assuming a lower PE of 12x-13x on CY09F earnings to arrive at the target prices of the big-cap plantation companies such as IOI, KLK and Wilmar. For the smaller companies, we have assumed a PE of 6x-8x. (See Charts 5-8 for PE bands of IOI, KLK, Kulim and Sarawak Oil Palms).
We are downgrading our recommendation on all the stocks under our coverage from BUY to SELL except for Sime Darby and IOI.
Although we have a SELL recommendation on TH Plantations, investors looking for dividend yield can consider the stock. TH Plantations’ attractive dividend yield of 6%-7% is underpinned by its official policy of a 50% payout from annual profit.
In spite of Wilmar’s integrated agribusiness, we recommend to SELL the stock as it is the most exposed to a slowdown in the Chinese economy.
WHY DOWNGRADE?
HIGHER-THAN-EXPECTED PALM OIL SUPPLY FROM INDONESIA IN 2009F
Output growth of 13% in 2009F
We believe that Indonesia will record a bumper harvest next year on the back of higher mature areas and more trees entering the productive age of seven to 15 years.
Output growth is expected to come from state-owned companies and smallholders. Also, the major listed plantation companies in both Malaysia and Indonesia are seen to account for nearly 30% of the country’s output (see Table 6).
Oil World, a monthly publication, has projected Indonesia’s CPO production to expand 13.3% to 21.3 million tonnes in 2009F from an estimated 18.8 million tonnes in 2008F (See Chart 2).
Based on our estimates, about one-half of the production growth forecast by Oil World would come from the regional plantation companies. The CPO output of the major listed plantation companies are expected to increase 6% to 5.8 million tonnes next year underpinned by a 3% increase in mature areas and a 4% improvement in FFB (fresh fruit bunch) yields.
Enhancements in FFB yield are envisaged to be partly driven by the favourable age profile of trees. For instance, approximately 84% of Golden Agri-Resources’ mature trees were in the prime years of seven to 18 as at end-2007 while 60% of Astra Agro Lestari’s mature trees were between 10 to 14 years as at January 2008.
Among the regional plantation companies, Bakrie Sumatra is expected to record the highest increase in CPO production in 2009F on the back of a 5% growth in mature areas and 11% improvement in FFB yield (see Tables 5 and 6). Following Bakrie Sumatra is Sampoerna Agro with a 14% climb in CPO output in 2009F (See Tables 5 and 6).
Long-term output growth could even be higher due to aggressive planting plans by companies
In five to ten years’ time, we believe that there is strong likelihood that palm oil production in Indonesia would grow at a double-digit rate per annum. This is due to aggressive planting plans not only by Indonesia-based companies but also by Malaysia and Singapore-based ones like Wilmar International and KLK.
At the minimum, these plantation companies are expected to cultivate 10,000ha of oil palm areas annually each (See Table 7). The most aggressive is Wilmar, which intends to plant up to 40,000ha of oil palm p.a. (See Table 7).
Based on the companies under our coverage, at least 100,000ha of landbank would be cultivated by the major companies in Indonesia every year. This is bigger than Kulim Bhd, which has approximately 82,906ha of plantation landbank but close to the size of Tradewinds Plantation Bhd, which has 129,332ha of landbank.
Assuming a conservative FFB yield of 18 tonnes/ha and oil extraction rate (OER) of 19%, then the potential CPO output from these new areas would be 342,000 tonnes/ year. This is 2% of Indonesia’s 2007 and Malaysia’s 2008F output, each.
As for Malaysia, barring unforeseen weather circumstances, industry expert, Mr MR Chandran has forecast the country’s output to expand 11% to 18 million tonnes in 2009F from 16.2 million tonnes estimated by MPOB (Malaysian Palm Oil Board) for 2008F.
Output growth is expected to come from new planting areas in Sarawak and enhancements in FFB yields in Sabah and Sarawak.
Sabah recorded a FFB yield of 23 tonnes/ha and OER of 21.3% in 2007 while Sarawak’s FFB yield and OER were 15.7 tonnes/ha and 21.0% respectively. There were approximately 1.1 million hectares of mature areas in Sabah and 500,000 hectares in Sarawak in 2006.
DEMAND FROM MAJOR IMPORTERS NOT CATCHING UP WITH SUPPLY
Although palm oil exports have been expanding YoY in the past six months, we believe that going forward, demand growth may not be able to catch up with supply. We reckon that palm oil demand from China and Europe will slow down. If the US biodiesel industry is affected by the developments in Europe, then demand for palm oil from the United States would also be affected.
We are of the view that Malaysian palm oil exports to China may reach its peak this year before tapering off next year. This is due to a few reasons.
First, high food prices are prompting consumers and manufacturers to cut down on spending. Instead of stocking up, they are now buying only according to their needs.
According to an industry player with sizeable operations in China, demand for palm oil in China has been growing at a slower rate in the past few months due to high prices. Instead of buying vegetable oil in large volumes, importers or manufacturers are now purchasing “just enough” for customers.
a:就是因为他们知道物价会在下个月下跌，所以才削减购买。
Second, we believe that palm oil exports to China in the past six months were partly driven by preparations for the 2008 Beijing Olympics Games. It is likely that demand would start to soften after the Olympics end in September 2008.
a:奥运年刺激需求上涨？
Finally, a significant 30% of palm oil are used in the industrial segment of oleochemical in China (See Chart 1). Therefore, if demand from this segment weakens due to uncertainties in the global economy, then there would be a fall in palm oil exports to China.
In 2007, Malaysian palm oil exports to China amounted to 3.8 million tonnes. Hence, a 10% reduction in demand would translate into 400,000 tonnes. In comparison, the country’s 2009F palm oil output is forecast to grow 11% to 18 million tonnes from 16.2 million tonnes in 2008F.
Palm oil exports to China rose 10% YoY to 1.8 million tonnes in 1H2008. We think that palm oil export growth to China would be between 7% to 10% this year and 5% to 7% for 2009F (2007: 7%).
Malaysia’s palm oil exports to China have climbed steadily since 1999 (See Chart 3). The highest growth of 21% was achieved in 2006 when China abolished the palm oil import quota under the World Trade Organisation guidelines. China took over from India as the largest importer of Malaysian palm oil in 2002.
As for Europe, we expect palm oil exports to continue to soften on two counts. First, the tax imposed on B100 biodiesel in Germany will continue to affect consumer
demand for biodiesel.
Second, a proposed reduction in European Union’s (EU) biofuel target from 10% to 4% by 2010F would affect demand and prices of vegetable oil. We will elaborate in the next section.
Last year, Malaysian palm oil exports to EU declined 20% to 2 million tonnes. In 1H2008, EU’s imports of palm oil from Malaysia fell 19% YoY to 900,000 tonnes.
PROPOSED REDUCTION IN EU’S 2020 BIOFUEL TARGET FROM 10% TO 4%
A recent World Bank report blamed the rise in global food prices to biofuel. It was estimated that 75% of the increase in global food prices was due to biofuel.
Following that report, in early July key officials of the EU began to distance themselves from the organisation’s target of using biofuel in 10% of transportation fuels by 2020.
Reuters quoted an EU lawmaker as saying that he has broad parliamentary backing to propose changing EU’s biofuel target to only 4% from 10%.
According to an EU statement, there is no official policy change and the Commission is still sticking to its original target of 10%. The Commission also said in early July that the 10% target does not include only biofuels but also renewable sources such as hydrogen or electricity power.
Although the 4% or 10% biofuel target is only a long-term target, we believe that it would have an impact on vegetable oil prices as blenders in EU would no longer be driven to produce as much biofuel as before.
source:USDA
Lower biodiesel demand from Europe will affect the biodiesel industry in the United States. According to various news reports, approximately 300 million gallons or 67% of 450 million gallons of biodiesel produced in USA were exported to EU last year. USA’s biodiesel exports represented 15% to 20% of the EU biodiesel market.
Additionally, as about 13% of soybean and 30% of corn in USA are expected to be used as feedstock to produce biofuel in 2008/09, a collapse in the US biodiesel industry would exert downward pressure on vegetable oil prices.
Direct impact on CPO price would also come in the form of lower imports of palm oil by EU. About half of EU’s biodiesel are produced using rapeseed oil. If biodiesel production were to decrease, then there would not be any shortage of rapeseed for the food segment. This would reduce palm oil imports by the EU.
Netherlands, which is the vegetable oil processing centre of Europe, has been importing less palm oil since last year. In 2007, palm oil exports to Netherlands fell 13% YoY to 1.5 million tonnes and 31% YoY to 500,000 tonnes in 1H2008 (See Chart 2).
INFLATION TO REDUCE DEMAND FROM THE DOWNSTREAM SEGMENT
Based on Indofood Agri-Resources’ 1QFY08 results, demand for downstream products such as cooking oil has been healthy in spite of higher selling prices. Going forward, we expect demand from this segment to remain positive as people still need to eat.
However, there could be weaker demand from the industrial segment of the downstream chain e.g. oleochemicals. Apart from food and beverage, fatty acids are used in many other industries such as electronic, paints and coating and plastics. Due to the current economic downturn, demand from these industries could falter.
Another reason for slower demand is the high prices of end-products. Oleochemical companies have been passing on rising feedstock costs in the form of higher selling prices.
Feedstock costs such as palm kernel oil or refined palm stearin have been climbing due to an increase in regional oleochemical production capacity and CPO price. Prices of palm kernel oil and refined palm stearin have risen by 50% and 29% respectively in the past 12 months.
According to an industry player early this year, global supply and demand for fatty acids are approximately 9.5 million tonnes/year and 6 million tonnes/year respectively. Out of the 9.5 million tonnes/year of world supply, about 6 million tonnes/year are from Asia. In China, nearly 30% of palm oil imported by the country are used in the oleochemical segment.
In Malaysia, according to MPOB total oleochemical production amounted to 2.6 million tonnes in 2007. To produce 0.92 tonnes of fatty acids, approximately one tonne of palm kernel oil is needed.
Hence, based only on Malaysia’s 2007 oleochemical production and disregarding demand from other countries, if there is a 10% decline in demand from the fatty acids segment, this would reduce CPO demand by 300,000 tonnes. This is about 2% of Malaysia’s 2008F estimated production of 16.2 million tonnes.
a:cpo也能取出fatty acid
IMPACT FROM MIDWEST FLOODS NOT AS SEVERE-AS-EXPECTED
Recent reports indicate that in spite of receding waters in the Midwest and minimal possibility of farmers replanting soybean, soybean output in the United States are still projected to increase in 2008/09F.
In its July report, USDA (United States Department of Agriculture) revised its soybean projections downwards to account for effects of the Midwest floods. The USDA trimmed its estimates for soybean harvested areas from 73.8 million acres to 72.1 million acres (See Table 8).
Forecast of soybean yield was also revised downwards, resulting in 2008/09F soybean production being lowered by 3.3% or 105 million bushels, to 3,000 million bushels. The projection of soybean ending stocks was revised downwards by 20% from 175 million bushels to 140 million bushels for 2008/09F.
Despite this, soybean output and ending stocks are still anticipated to rise in 2008/09F. The USDA forecasts soybean production to expand 16% to 3,000 million bushels in 2008/09F, 3% lower than its estimate of 3,105 million bushels reported in June. Ending stocks are expected to climb 12% to 140 million bushels in 2008/09F versus June’s forecast of 175 million bushels.
Globally, soybean production is envisaged to rise 9% to 237.8 million tonnes in 2008/09F while ending stocks are expected to remain flat at 48.9 million tonnes due to smaller beginning stocks in the year. Interestingly, usage or demand for soybean is projected to inch up only 2% in 2008/09F.
US LAWMAKERS SOFTENING BIOFUEL STANCE
Currently, the US energy law (signed in 2007) mandates 15 billion gallons of ethanol in fuel supply annually by 2015 and that 36 billion gallons a year of renewable energy be blended into gasoline by 2022.
However, an increasing number of US senators and governors have been calling for a softer stance in the country’s biofuel policy due to rising food prices.
The first was Texas, which requested for an exemption from the US energy law in April this year. Texas Governor Rick Perry is seeking a year-long waiver of 50% of the mandate. Connecticut Governor Jodi Rell in early May asked that the energy requirements be put on hold.
A US Senator in Texas said that she would soon be proposing a bill to freeze the new national biofuel mandate. In Missouri, some lawmakers were unsuccessfully pushing for a cancellation of the state’s ethanol mandate in April. Missouri law mandates all gasoline contain 10% ethanol.
Going forward, the risk is that the current energy law would be frozen or more states in the US would ask for a waiver against the energy law. This will result in falling demand for soybean and corn.
Presently, the waiver request by the Texas Governor is being considered by USA’s Environmental Protection Agency (EPA). A decision will be made by August this year. According to a CBOT (Chicago Board of Trade) report in May, the EPA has the power to modify the renewable fuels requirement under a 2005 law that mandates the production of 7.5 billion gallons of biofuel a year by 2012 versus the current mandate of 9 billion gallons of biofuel for 2008 alone.
We believe that if the EPA approves the request of the Texas state to reduce its biofuel target, then other states would follow suit. This would reduce demand for corn and soybean oil.
According to the latest USDA projections, nearly 30% of corn supply will be used as feedstock to make ethanol in 2008/09. In 2007/08, the percentage of corn used in the ethanol industry was about 20%.
As for soybean oil, approximately 13% of the vegetable oil supplies would be used by the biodiesel industry in 2008/ 09F compared to 11% in 2007/08.
US LAWMAKERS TIGHTENING STANCE ON CRUDE OIL SPECULATION
Recently, the US Senate voted to consider a bill that would curb speculation in the oil markets. This bill would require the Commodity Futures Trading Commission (CFTC) to set limits on trading in oil markets by investors and speculators and close a loophole that allows speculators trading on the London oil market to escape scrutiny by US regulators.
Although according to news reports, it would be difficult to secure bipartisan approval to pass the bill, we believe that the development is an indication of increased scrutiny on the energy markets.
So far, there has been no mention on limits on agricultural commodity futures yet. Recall that in June this year, the CFTC had already announced disclosure-based initiatives to address concerns in the commodity futures market. Some of the initiatives included proposals to routinely require more detailed information from index traders and revisions to improve effectiveness of of agricultural trade options.
EU’S BACKLASH AGAINST US BIODIESEL
In April 2008, the European Biodiesel Board (EBB) launched a legal complaint to the European Commission against unfair subsidised biodiesel exports from the United States.
According to EBB, EU biofuel producers have been languishing due to the cheaper biofuel exports from USA. The EBB urged the European Commission to initiate an anti-dumping and anti-subsidy investigation with a view to impose counter measures against US biodiesel.
Currently, the European Commission is still conducting investigations as to whether there has been unfair trade practices. The investigation is only scheduled to be completed in June 2009. However, the Commission may impose provisional measures within a nine months period from the date of the complaint i.e. June 2008.
It would be detrimental to the US biodiesel industry if the EU were to ban or impose measures restricting US biodiesel. This is because more than one-half of the biodiesel produced in USA are exported to EU. In addition, a significant proportion of corn and soybean are used as feedstock to manufacture biofuel.
A silver lining is that US has reduced its subsidy for ethanol from 51 US cents/gallon or US$155/tonne to 46 US cents/gallon or US$140/tonne. Hence, this should help make EU biodiesel slightly more competitive against US biofuel and alleviate some of the complaints.
The flipside is that the reduction in subsidy is only for ethanol and not biodiesel i.e. biofuel made from soybean. Most of the biofuel exported from the United States to the EU are biodiesel.
CONCLUSION
In summary, there has been increasing backlash against biodiesel as it is said to be the main cause of food inflation. One of the drivers of CPO price was supportive EU and US biofuel policies. Therefore, if these policies were reversed, there would be a downward pressure on CPO prices.
While there is more downside risk for CPO prices, the upside is increasingly limited, barring unpredictable weather. Hence, we are downgrading the plantation sector to UNDERWEIGHT from OVERWEIGHT.
24 July 2008
Rescinds acquisition of Sarawak landbank
27 May 2008
RM7.40
Target Price: RM10.30
YE to June FY07 FY08F FY09F FY10F
FD EPS 22.7 33.3 39.1 41.5
FD PE (x) 32.6 22.2 18.9 17.8
Source : AmResearch
IOI Corporation has rescinded its proposed acquisition of majority shareholding in companies, which own 44,350 ha of landbank in Sarawak. The purchase consideration was supposed to be RM439.9m. According to the announcement, the reason for the rescindment is non-fulfillment of conditions. Recall that the proposed acquisition was first announced on 18 March 2008. The acquisition would have increased IOI’s plantation landbank to 262,428 ha. After the assumption of RM33.7m borrowings, the acquisition would have priced the Sarawak landbank at an undemanding enterprise value of RM10,677/ha
We have not factored in any contribution from the above landbank into our earnings forecast. We have previously estimated that the landbank would only improve IOI’s FY09F net profit by 1.6% as only 10% of the landbank are mature. In addition, only about 30% of the landbank are already planted with palm oil
We do not think that the rescindment of the proposed acquisition is a setback to IOI’s landbank expansion plans. We believe that the group would be busy developing 10,000 ha to 15,000 ha of landbank in Indonesia into oil palm estates this year
Currently, we estimate IOI has 218,078 ha of landbank in Malaysia and Indonesia. Out of these, approximately 49% are located in Sabah, 24% in Indonesia, 23% in Peninsular Malaysia and 4% in Sarawak
The age profile of IOI’s trees is attractive as about 73% of the oil palm trees are in the prime 7-15 years. In the longer-term, as these trees become older, young trees from IOI’s plantings in Indonesia would start to bear fruit and replace the contribution of the older trees
Maintain Buy on IOI as it is a proxy to the KLCI and plantation sector. As the group is one of the most efficient players in the Malaysian plantation industry, IOI would benefit from the uptick in CPO prices. IOI is also an increasingly global player in the specialty fats and oleochemical industries via its operations in USA and Europe.
note:out of season research of today.
RM7.40
Target Price: RM10.30
YE to June FY07 FY08F FY09F FY10F
FD EPS 22.7 33.3 39.1 41.5
FD PE (x) 32.6 22.2 18.9 17.8
Source : AmResearch
IOI Corporation has rescinded its proposed acquisition of majority shareholding in companies, which own 44,350 ha of landbank in Sarawak. The purchase consideration was supposed to be RM439.9m. According to the announcement, the reason for the rescindment is non-fulfillment of conditions. Recall that the proposed acquisition was first announced on 18 March 2008. The acquisition would have increased IOI’s plantation landbank to 262,428 ha. After the assumption of RM33.7m borrowings, the acquisition would have priced the Sarawak landbank at an undemanding enterprise value of RM10,677/ha
We have not factored in any contribution from the above landbank into our earnings forecast. We have previously estimated that the landbank would only improve IOI’s FY09F net profit by 1.6% as only 10% of the landbank are mature. In addition, only about 30% of the landbank are already planted with palm oil
We do not think that the rescindment of the proposed acquisition is a setback to IOI’s landbank expansion plans. We believe that the group would be busy developing 10,000 ha to 15,000 ha of landbank in Indonesia into oil palm estates this year
Currently, we estimate IOI has 218,078 ha of landbank in Malaysia and Indonesia. Out of these, approximately 49% are located in Sabah, 24% in Indonesia, 23% in Peninsular Malaysia and 4% in Sarawak
The age profile of IOI’s trees is attractive as about 73% of the oil palm trees are in the prime 7-15 years. In the longer-term, as these trees become older, young trees from IOI’s plantings in Indonesia would start to bear fruit and replace the contribution of the older trees
Maintain Buy on IOI as it is a proxy to the KLCI and plantation sector. As the group is one of the most efficient players in the Malaysian plantation industry, IOI would benefit from the uptick in CPO prices. IOI is also an increasingly global player in the specialty fats and oleochemical industries via its operations in USA and Europe.
note:out of season research of today.
RSPO accreditation for four firms
24 July 2008 amresearch
The Edge Financial Daily reported that Sime Darby, IOI Corporation, Kulim and United Plantations would secure the Roundtable for Sustainable Palm Oil (RSPO) certification in the next few weeks
We view this development positively as it would allow the four group of companies to export their palm oil products to Europe without any hassles or face any protests. RSPO guidelines were put in place to address the concerns of non-governmental organisations in Europe that palm oil is planted at the expense of the environment
RSPO guidelines are also increasingly important as some multinational consumer companies may only purchase certified palm oil in the future. For instance, Unilever has said that it would only buy certified palm oil by 2015
Currently, the certification is done by independent bodies such as SGS Malaysia and Control Union and the cost of the certification is borned by the plantation companies themselves. We believe that certified palm oil may command a slight premium over non-certified palm oil as plantation companies pass on some of the cost of certification in the form of higher selling price
RSPO guidelines include implementation of a proper water management system and non-use of fire on peat soil. A few of the guidelines such as non-usage of fire to open up plantation areas are already being practised by plantation companies in Malaysia and Indonesia
Among the plantation companies under our coverage, Wilmar International was the only one that faced complaints in the past. Some of the allegations made against Wilmar related to local communities’ rights on land clearing, poor quality of Environmental Impact Assessment (EIA) reports, conversion of forests without conducting High Conservation Value Forest (HCVF) assessments and open fire burning
In response to these complaints, Wilmar has said that it would observe all legal and statutory requirements for land development and pay special attention to the potential presence of HCVF in the future
Our current recommendations are Buy for Sime Darby and IOI Corporation and Hold for Kulim. We would be reviewing these recommendations soon.
The Edge Financial Daily reported that Sime Darby, IOI Corporation, Kulim and United Plantations would secure the Roundtable for Sustainable Palm Oil (RSPO) certification in the next few weeks
We view this development positively as it would allow the four group of companies to export their palm oil products to Europe without any hassles or face any protests. RSPO guidelines were put in place to address the concerns of non-governmental organisations in Europe that palm oil is planted at the expense of the environment
RSPO guidelines are also increasingly important as some multinational consumer companies may only purchase certified palm oil in the future. For instance, Unilever has said that it would only buy certified palm oil by 2015
Currently, the certification is done by independent bodies such as SGS Malaysia and Control Union and the cost of the certification is borned by the plantation companies themselves. We believe that certified palm oil may command a slight premium over non-certified palm oil as plantation companies pass on some of the cost of certification in the form of higher selling price
RSPO guidelines include implementation of a proper water management system and non-use of fire on peat soil. A few of the guidelines such as non-usage of fire to open up plantation areas are already being practised by plantation companies in Malaysia and Indonesia
Among the plantation companies under our coverage, Wilmar International was the only one that faced complaints in the past. Some of the allegations made against Wilmar related to local communities’ rights on land clearing, poor quality of Environmental Impact Assessment (EIA) reports, conversion of forests without conducting High Conservation Value Forest (HCVF) assessments and open fire burning
In response to these complaints, Wilmar has said that it would observe all legal and statutory requirements for land development and pay special attention to the potential presence of HCVF in the future
Our current recommendations are Buy for Sime Darby and IOI Corporation and Hold for Kulim. We would be reviewing these recommendations soon.
Cristina Fernández de Kirchner
阿根廷女总统，自接替他丈夫的总统职位以来，这次的出口税事件令她的声望降到20%谷底。声望下跌也不全是新税制造成的，而是她没有前瞻事态发展，原是一个农民局部斗争，局势不可控制，变成了全民斗争。
值得一提，我认为阿根廷不会完全撤消出口税(30%)，应该是分析员误导了。
Argentina blocks farm export tax
By Alexei Barrionuevo
Published: July 18, 2008
RIO DE JANEIRO: Argentina's Senate narrowly rejected the agricultural export tax increases that caused a nationwide farmer rebellion when the country's vice president sided with agriculture producers early Thursday and cast the deciding vote against the measure.
The Senate voted 37 to 36 to reject the system of floating-rate taxes that the government of President Cristina Fernández de Kirchner imposed in March without first consulting with her nation's Congress.
The vote was a stunning turn of events in the four-month-old conflict that has roiled Argentina, one of the world's major agricultural exporters. And it was a stinging repudiation of Kirchner's insular and confrontational style of governing that portrayed farm groups as enemies of the state bent on destabilizing her seven-month-old government.
Yet while the vote means that Congress rejected Kirchner's attempt to make the higher taxes law, it did not revoke the new system, which will remain in place for now, analysts said. That leaves the beleaguered president with a tough political decision: continue to insist on the taxes and risk further political damage to her Peronist bloc's hold on Congress, or give up the $3 billion to $4 billion in additional revenues a year that the higher taxes are reaping for the national treasury.
Whatever she decides, Kirchner and her husband, former President Néstor Kirchner, who leads the Peronist bloc, emerge badly wounded from the protracted battle with agricultural producers, analysts said.
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"This is a huge blow to the Kirchners, a major defeat on an issue that they framed as a defining moment of their presidency," said Daniel Kerner, an analyst with Eurasia Group, a political risk analysis consultancy based in New York. "It would be political suicide for them to keep the higher taxes in place now."
On Thursday, Kirchner did not directly address the Senate vote at her only public appearance, in the northern city of Chaco. But on Tuesday, her husband said that "we will respect the decision Congress makes, whatever it is."
Julio Cobos, Argentina's vice president and a former governor of Mendoza, broke the tie after nearly 18 hours of often emotional debate among the senators. His voice weary and sometimes cracking, Cobos sounded almost apologetic as he explained why he was voting against a measure that Kirchner and her husband had fought so hard to defend.
"I don't believe that a law works that does not offer a solution to this conflict," Cobos said. "However history may judge me, I ask for forgiveness if I am making a mistake."
It was a moment of high drama in Argentina's capital, Buenos Aires, carried live on national television. While farm leaders called his actions patriotic, his repudiation of his president may have been "the beginning of a political institutional crisis," said Artemio López, an analyst in Buenos Aires.
For the Kirchners, Cobos's vote added insult to injury and was likely to ratchet up pressure on them to moderate their bruising style of politics and seek more consensus heading into congressional elections next October, said Graciela Romer, an analyst in Buenos Aires.
"This vote showed that she has lost power and legitimacy in her own political coalition," Romer said. "Everything depends on what path the president chooses going forward. If she deepens the divisive style she has shown, she could have problems running the country."
The new tax system raised taxes on soybeans from a fixed rate of 35 percent to a rate that has floated with global prices to more than 44 percent. Amid rising costs for farm materials, it provoked a series of crippling strikes that shut down highways for grain trucks bound for export and caused scattered food shortages.
The Kirchners justified the higher taxes as critical to plans to redistribute wealth and hold down Argentina's food prices. But they stoked tensions by portraying the farmers as a political threat, calling them "greedy" and "coup plotters."
Last month a series of huge pro-farmer rallies throughout the country finally pushed Kirchner, whose approval rating had plummeted to as low as 20 percent, to take the calculated risk of sending the measure to Congress for approval. The president's Peronist bloc controls both houses of Congress.
But analysts said the Kirchners underestimated the support for agricultural producers both in the provinces and in the capital itself.
"For us, agriculture is the economy," said Ruben Hugo Marin, a senator from La Pampa who is part of the Front for Victory party that generally supports the Kirchners, in explaining his no vote.
The vote was not expected to be so close in the Senate, but a pro-farmer march on Tuesday in Buenos Aires of an estimated 235,000 people appeared to have an impact. A government rally heavy with trade unions and labor groups drew 100,000 to the city the same day.
Shortly after Emilio Rached, a senator from the province of Santiago del Estero, cast the critical vote that force the tie, all eyes turned to Cobos, who took the microphone just after 4 a.m. "The Argentine president is going to understand us, she is going to understand me," Cobos said. "My vote is not in favor, my vote is against."
Later Thursday, Cobos explained his vote in a televised interview, saying that Kirchner's unwillingness to make "small modifications" caused him to vote against the measure. "I agree with the distribution of wealth," he added. But, he said, "I also know that one has to see a reasonable profit. To redistribute wealth, one has to create it."
Vinod Sreeharsha contributed reporting from Buenos Aires.Vinod Sreeharsha contributed reporting from Buenos Aires.
Farmers in Buenos Aires on Thursday celebrated the rejection by the Argentinian senate of the grain-export tax package. (Natacha Pisarenko/The Associated Press)
ARGENTINA: Farmers Up in Arms Against Export Tax Hike
By Marcela Valente
BUENOS AIRES, Mar 21 (IPS) - Farmers in Argentina are on their ninth day of protests against a recent government decision to increase taxes on exports of grain, whose prices have skyrocketed thanks to strong international demand.
The angriest protests are taking place in the heart of soybean country, in central and eastern Argentina, where hundreds of roadblocks have been staged.
Transgenic soybeans are the top export product and the most widely planted crop in Argentina, which is the third-largest soybean producer in the world after the United States and Brazil, and the leading exporter of soybean oil.
The reaction was triggered by a call from Argentina’s main rural associations, which urged farmers not to sell their grain or beef to wholesalers or commodity markets. The demonstrations, which are to continue until Tuesday, Mar. 25, could cause food shortages in the cities.
And although the rural associations promised to lift the traffic blockades during Easter vacation, farmers in some rural towns kept their roadblocks in place on Good Friday.
"The countryside on its feet", "If they want war, they’ll have it" and "The rural sector says: Basta! (enough)" read some of the signs carried by farmers protesting on foot or on tractor, harvester and truck, which were parked across the roads.
Small, medium and large farmers have thus come together against the new sliding scale of higher taxes on grain exports, which were increased from 35 to 44 percent in the case of soybeans and from 32 to 39 percent in the case of sunflowers, for example.
Some analysts say the tax hike is aimed at keeping domestic grain prices artificially low and ensuring domestic supplies. Because international commodity prices are so high, without the tax on exports, there is little incentive to sell soybeans and other grains on the domestic market.
Agriculture is booming, with a record grain output of 90 million tons last year. Nevertheless, farmers complain that the taxes are absorbing a large share of their profits.
Economy Minister Martín Lousteau reiterated Wednesday that the export tax increase would remain in place, despite the opposition from the farmers.
The new taxes, announced on Mar. 11, will vary depending on international grain prices, rising as prices go up or shrinking as they drop.
The minister pointed out that the state provided relief to farmers in 2002 when the peso was unpegged from the dollar and abruptly plunged, and thousands of farmers indebted in dollars found themselves in serious trouble. He also noted that the current exchange rate of around 3.14 pesos against the dollar benefits farmers and serves as an incentive for production.
He compared the situation with the conditions faced by soybean farmers in Brazil, where export taxes are not charged, but the exchange rate of 1.73 reals to the dollar is less competitive than Argentina’s rate.
Lousteau also stressed that if demand for commodities, driven by China and India, continues to rise, prices will go up too, as will tax revenues, but that if prices drop, the state will relinquish part of its share.
However, Pablo Orsolini, vice president of the Federación Agraria Argentina, the rural association that represents small farmers, told IPS that "the government says it is not going to back down on this, but we’ll see what happens if food starts to be in short supply in the supermarkets and people complain."
"The state is going to take in 12 billion dollars this year in export taxes on soybeans alone, but that money does not makes its way back to the countryside," he protested.
Export taxes are not included in the tax revenues that are shared with the provinces by means of a co-participation system, but go to the national treasury, whose surplus stands at around four percent of gross domestic product (GDP).
Orsolini admitted that "except in certain cases," the conditions in which small farmers find themselves today are "not anything like the situation they were experiencing in the late 1990s," when thousands of heavily indebted farmers went bankrupt and lost their farms.
Back then, the Argentine peso was still pegged to the dollar by the currency board system, compared to today’s exchange rate of 3.14 pesos to the dollar.
In addition, farm commodity prices have grown steadily over the last few years, and demand is not expected to drop any time soon.
"At that time, farmers could not even afford fuel for their trucks, to drive to a roadblock," said Orsolini.
But today, he added, "people are afraid of returning to that situation again."
The Federación Agraria Argentina is not opposed to export taxes but argues that they should vary, depending on the size of the farm.
"These taxes hurt large producers very little," said Orsolini.
He explained that his organisation is proposing a system under which those who produce less than 600 tons of soybeans a year would pay up to 25 percent in taxes, and farmers producing between 600 and 1,500 tons would pay 35 percent, while only those with harvests of over 1,500 tons would pay a higher tax.
"We are proposing this because 85 percent of farmers fall into the first two categories, and large-scale production, which is the most competitive and can pay higher taxes, accounts for only 15 percent of farmers," he said.
Orsolini dismisses the government’s arguments, according to which the tax hike is aimed at discouraging the spread of monoculture soy plantations and at stimulating farmers to increase their incomes by adding value to what they produce, through agro-industry initiatives.
"If what they want is for farmers to have alternatives, there should be policies providing incentives, but there aren’t," he argued. "The state says it helps dairy producers by means of subsidies, but that doesn't suffice. There are many dairy farms that have preferred to close down, in order to plant soybeans instead."
Some farmers have leased their land. "The current rental price for 100 hectares of land in the heart of soybean country allows the owner to live like a king without working, earning an income that until a week ago was 5,000 dollars a month," said Orsolini.
Inca Paulero, who owns 500 hectares in General Deheza, in the central province of Córdoba, told IPS that "I lease my fields, and my income has risen by a factor of 7.6 since 2001."
Paulero, 76, said he believes that the farmers who are protesting are "greedy" because "they have the ideas of the free market stuck in their heads." But he said that "if you visit the province, it is obvious that the farmers are doing well."
"You can see that in the small towns, where there are no industries, and everyone is building and producing," he said.
As a result of the boom, the value of the farmland most suitable for growing soybeans has risen up to fourfold. "It’s true that costs have gone up, because the price of fertilisers is growing and many are taking advantage of the new situation, but the business is profitable just the same," said Paulero.
In his case, the returns will stay in the countryside. "I’m building a cattle feedlot on four or five hectares where I had an abandoned five-bedroom house."
To do so, he had to invest 50,000 pesos (around 17,000 dollars) to drill for water. The waiting list for the excavator has 22 people on it.
"I’m too old to start this business, but I’m going to rent it out to someone who’s interested in setting up shop," said Paulero, who did not rule out the possibility of becoming a partner in the new undertaking. (END/2008)
值得一提，我认为阿根廷不会完全撤消出口税(30%)，应该是分析员误导了。
Argentina blocks farm export tax
By Alexei Barrionuevo
Published: July 18, 2008
RIO DE JANEIRO: Argentina's Senate narrowly rejected the agricultural export tax increases that caused a nationwide farmer rebellion when the country's vice president sided with agriculture producers early Thursday and cast the deciding vote against the measure.
The Senate voted 37 to 36 to reject the system of floating-rate taxes that the government of President Cristina Fernández de Kirchner imposed in March without first consulting with her nation's Congress.
The vote was a stunning turn of events in the four-month-old conflict that has roiled Argentina, one of the world's major agricultural exporters. And it was a stinging repudiation of Kirchner's insular and confrontational style of governing that portrayed farm groups as enemies of the state bent on destabilizing her seven-month-old government.
Yet while the vote means that Congress rejected Kirchner's attempt to make the higher taxes law, it did not revoke the new system, which will remain in place for now, analysts said. That leaves the beleaguered president with a tough political decision: continue to insist on the taxes and risk further political damage to her Peronist bloc's hold on Congress, or give up the $3 billion to $4 billion in additional revenues a year that the higher taxes are reaping for the national treasury.
Whatever she decides, Kirchner and her husband, former President Néstor Kirchner, who leads the Peronist bloc, emerge badly wounded from the protracted battle with agricultural producers, analysts said.
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"This is a huge blow to the Kirchners, a major defeat on an issue that they framed as a defining moment of their presidency," said Daniel Kerner, an analyst with Eurasia Group, a political risk analysis consultancy based in New York. "It would be political suicide for them to keep the higher taxes in place now."
On Thursday, Kirchner did not directly address the Senate vote at her only public appearance, in the northern city of Chaco. But on Tuesday, her husband said that "we will respect the decision Congress makes, whatever it is."
Julio Cobos, Argentina's vice president and a former governor of Mendoza, broke the tie after nearly 18 hours of often emotional debate among the senators. His voice weary and sometimes cracking, Cobos sounded almost apologetic as he explained why he was voting against a measure that Kirchner and her husband had fought so hard to defend.
"I don't believe that a law works that does not offer a solution to this conflict," Cobos said. "However history may judge me, I ask for forgiveness if I am making a mistake."
It was a moment of high drama in Argentina's capital, Buenos Aires, carried live on national television. While farm leaders called his actions patriotic, his repudiation of his president may have been "the beginning of a political institutional crisis," said Artemio López, an analyst in Buenos Aires.
For the Kirchners, Cobos's vote added insult to injury and was likely to ratchet up pressure on them to moderate their bruising style of politics and seek more consensus heading into congressional elections next October, said Graciela Romer, an analyst in Buenos Aires.
"This vote showed that she has lost power and legitimacy in her own political coalition," Romer said. "Everything depends on what path the president chooses going forward. If she deepens the divisive style she has shown, she could have problems running the country."
The new tax system raised taxes on soybeans from a fixed rate of 35 percent to a rate that has floated with global prices to more than 44 percent. Amid rising costs for farm materials, it provoked a series of crippling strikes that shut down highways for grain trucks bound for export and caused scattered food shortages.
The Kirchners justified the higher taxes as critical to plans to redistribute wealth and hold down Argentina's food prices. But they stoked tensions by portraying the farmers as a political threat, calling them "greedy" and "coup plotters."
Last month a series of huge pro-farmer rallies throughout the country finally pushed Kirchner, whose approval rating had plummeted to as low as 20 percent, to take the calculated risk of sending the measure to Congress for approval. The president's Peronist bloc controls both houses of Congress.
But analysts said the Kirchners underestimated the support for agricultural producers both in the provinces and in the capital itself.
"For us, agriculture is the economy," said Ruben Hugo Marin, a senator from La Pampa who is part of the Front for Victory party that generally supports the Kirchners, in explaining his no vote.
The vote was not expected to be so close in the Senate, but a pro-farmer march on Tuesday in Buenos Aires of an estimated 235,000 people appeared to have an impact. A government rally heavy with trade unions and labor groups drew 100,000 to the city the same day.
Shortly after Emilio Rached, a senator from the province of Santiago del Estero, cast the critical vote that force the tie, all eyes turned to Cobos, who took the microphone just after 4 a.m. "The Argentine president is going to understand us, she is going to understand me," Cobos said. "My vote is not in favor, my vote is against."
Later Thursday, Cobos explained his vote in a televised interview, saying that Kirchner's unwillingness to make "small modifications" caused him to vote against the measure. "I agree with the distribution of wealth," he added. But, he said, "I also know that one has to see a reasonable profit. To redistribute wealth, one has to create it."
Vinod Sreeharsha contributed reporting from Buenos Aires.Vinod Sreeharsha contributed reporting from Buenos Aires.
Farmers in Buenos Aires on Thursday celebrated the rejection by the Argentinian senate of the grain-export tax package. (Natacha Pisarenko/The Associated Press)
ARGENTINA: Farmers Up in Arms Against Export Tax Hike
By Marcela Valente
BUENOS AIRES, Mar 21 (IPS) - Farmers in Argentina are on their ninth day of protests against a recent government decision to increase taxes on exports of grain, whose prices have skyrocketed thanks to strong international demand.
The angriest protests are taking place in the heart of soybean country, in central and eastern Argentina, where hundreds of roadblocks have been staged.
Transgenic soybeans are the top export product and the most widely planted crop in Argentina, which is the third-largest soybean producer in the world after the United States and Brazil, and the leading exporter of soybean oil.
The reaction was triggered by a call from Argentina’s main rural associations, which urged farmers not to sell their grain or beef to wholesalers or commodity markets. The demonstrations, which are to continue until Tuesday, Mar. 25, could cause food shortages in the cities.
And although the rural associations promised to lift the traffic blockades during Easter vacation, farmers in some rural towns kept their roadblocks in place on Good Friday.
"The countryside on its feet", "If they want war, they’ll have it" and "The rural sector says: Basta! (enough)" read some of the signs carried by farmers protesting on foot or on tractor, harvester and truck, which were parked across the roads.
Small, medium and large farmers have thus come together against the new sliding scale of higher taxes on grain exports, which were increased from 35 to 44 percent in the case of soybeans and from 32 to 39 percent in the case of sunflowers, for example.
Some analysts say the tax hike is aimed at keeping domestic grain prices artificially low and ensuring domestic supplies. Because international commodity prices are so high, without the tax on exports, there is little incentive to sell soybeans and other grains on the domestic market.
Agriculture is booming, with a record grain output of 90 million tons last year. Nevertheless, farmers complain that the taxes are absorbing a large share of their profits.
Economy Minister Martín Lousteau reiterated Wednesday that the export tax increase would remain in place, despite the opposition from the farmers.
The new taxes, announced on Mar. 11, will vary depending on international grain prices, rising as prices go up or shrinking as they drop.
The minister pointed out that the state provided relief to farmers in 2002 when the peso was unpegged from the dollar and abruptly plunged, and thousands of farmers indebted in dollars found themselves in serious trouble. He also noted that the current exchange rate of around 3.14 pesos against the dollar benefits farmers and serves as an incentive for production.
He compared the situation with the conditions faced by soybean farmers in Brazil, where export taxes are not charged, but the exchange rate of 1.73 reals to the dollar is less competitive than Argentina’s rate.
Lousteau also stressed that if demand for commodities, driven by China and India, continues to rise, prices will go up too, as will tax revenues, but that if prices drop, the state will relinquish part of its share.
However, Pablo Orsolini, vice president of the Federación Agraria Argentina, the rural association that represents small farmers, told IPS that "the government says it is not going to back down on this, but we’ll see what happens if food starts to be in short supply in the supermarkets and people complain."
"The state is going to take in 12 billion dollars this year in export taxes on soybeans alone, but that money does not makes its way back to the countryside," he protested.
Export taxes are not included in the tax revenues that are shared with the provinces by means of a co-participation system, but go to the national treasury, whose surplus stands at around four percent of gross domestic product (GDP).
Orsolini admitted that "except in certain cases," the conditions in which small farmers find themselves today are "not anything like the situation they were experiencing in the late 1990s," when thousands of heavily indebted farmers went bankrupt and lost their farms.
Back then, the Argentine peso was still pegged to the dollar by the currency board system, compared to today’s exchange rate of 3.14 pesos to the dollar.
In addition, farm commodity prices have grown steadily over the last few years, and demand is not expected to drop any time soon.
"At that time, farmers could not even afford fuel for their trucks, to drive to a roadblock," said Orsolini.
But today, he added, "people are afraid of returning to that situation again."
The Federación Agraria Argentina is not opposed to export taxes but argues that they should vary, depending on the size of the farm.
"These taxes hurt large producers very little," said Orsolini.
He explained that his organisation is proposing a system under which those who produce less than 600 tons of soybeans a year would pay up to 25 percent in taxes, and farmers producing between 600 and 1,500 tons would pay 35 percent, while only those with harvests of over 1,500 tons would pay a higher tax.
"We are proposing this because 85 percent of farmers fall into the first two categories, and large-scale production, which is the most competitive and can pay higher taxes, accounts for only 15 percent of farmers," he said.
Orsolini dismisses the government’s arguments, according to which the tax hike is aimed at discouraging the spread of monoculture soy plantations and at stimulating farmers to increase their incomes by adding value to what they produce, through agro-industry initiatives.
"If what they want is for farmers to have alternatives, there should be policies providing incentives, but there aren’t," he argued. "The state says it helps dairy producers by means of subsidies, but that doesn't suffice. There are many dairy farms that have preferred to close down, in order to plant soybeans instead."
Some farmers have leased their land. "The current rental price for 100 hectares of land in the heart of soybean country allows the owner to live like a king without working, earning an income that until a week ago was 5,000 dollars a month," said Orsolini.
Inca Paulero, who owns 500 hectares in General Deheza, in the central province of Córdoba, told IPS that "I lease my fields, and my income has risen by a factor of 7.6 since 2001."
Paulero, 76, said he believes that the farmers who are protesting are "greedy" because "they have the ideas of the free market stuck in their heads." But he said that "if you visit the province, it is obvious that the farmers are doing well."
"You can see that in the small towns, where there are no industries, and everyone is building and producing," he said.
As a result of the boom, the value of the farmland most suitable for growing soybeans has risen up to fourfold. "It’s true that costs have gone up, because the price of fertilisers is growing and many are taking advantage of the new situation, but the business is profitable just the same," said Paulero.
In his case, the returns will stay in the countryside. "I’m building a cattle feedlot on four or five hectares where I had an abandoned five-bedroom house."
To do so, he had to invest 50,000 pesos (around 17,000 dollars) to drill for water. The waiting list for the excavator has 22 people on it.
"I’m too old to start this business, but I’m going to rent it out to someone who’s interested in setting up shop," said Paulero, who did not rule out the possibility of becoming a partner in the new undertaking. (END/2008)
sector update 21 July 2008
Cautious outlook this week
OVERWEIGHT
Last Friday, plantation stocks plunged on the back of lower CPO (crude palm oil) futures price following a fall in crude oil prices. Three-month CPO futures eased RM43/tonne to RM3,392/tonne last Friday while crude oil was relatively unchanged.
Corn and soybean prices also closed lower last week. According to a CBOT (Chicago Board of Trade) report, corn prices ended down due to improving crop outlook underpinned by diminishing weather concerns while soybean prices retraced as Argentina has rescinded an export tax, which had sparked farmers’ protests in the past couple of months.
It is likely that sentiment on plantation stocks would remain cautious this week in spite of some positive news released by the US Department of Agriculture (USDA) last week.
In its latest projection, the USDA has trimmed its estimates for soybean harvested areas from 73.8 million acres to 72.1 million acres. Also, forecast of soybean yield has been revised downwards, resulting in 2008/09 soybean production being lower by 3.3% or 105 million bushels to 3 billion bushels. The projection of ending stocks of soybean have also been revised downwards by 20% from 175 million bushels to 140 million bushels for 2008/09.
After the revision in forecasts, soybean output are projected to rise 16% to 3 billion bushels in 2008/09 versus 20% previously while ending stocks are estimated to increase 12% to 140 million bushels in 2008/09 against the previous forecast of 40%.
According to USDA, although water levels in the Midwest have receded, there was little time for replanting. For nearly all of Midwest, 20 June was the final date to plant soybean crop fully covered by crop insurance.
As for palm oil, the Malaysian Palm Oil Board has forecast CPO output to rise 3% to 16.2 million tonnes this year while CPO production in Indonesia are projected to climb 6% to 14% to a range of 18.4 million to 19.8 million tonnes.After a bumper harvest in 1H2008, we expect CPO production in Malaysia remain softer in 2H. We reckon that the risk to prices is oversupply next year.
We would be coming out with a sector update soon. Our current recommendation on the sector is OVERWEIGHT. --amresearch
OVERWEIGHT
Last Friday, plantation stocks plunged on the back of lower CPO (crude palm oil) futures price following a fall in crude oil prices. Three-month CPO futures eased RM43/tonne to RM3,392/tonne last Friday while crude oil was relatively unchanged.
Corn and soybean prices also closed lower last week. According to a CBOT (Chicago Board of Trade) report, corn prices ended down due to improving crop outlook underpinned by diminishing weather concerns while soybean prices retraced as Argentina has rescinded an export tax, which had sparked farmers’ protests in the past couple of months.
It is likely that sentiment on plantation stocks would remain cautious this week in spite of some positive news released by the US Department of Agriculture (USDA) last week.
In its latest projection, the USDA has trimmed its estimates for soybean harvested areas from 73.8 million acres to 72.1 million acres. Also, forecast of soybean yield has been revised downwards, resulting in 2008/09 soybean production being lower by 3.3% or 105 million bushels to 3 billion bushels. The projection of ending stocks of soybean have also been revised downwards by 20% from 175 million bushels to 140 million bushels for 2008/09.
After the revision in forecasts, soybean output are projected to rise 16% to 3 billion bushels in 2008/09 versus 20% previously while ending stocks are estimated to increase 12% to 140 million bushels in 2008/09 against the previous forecast of 40%.
According to USDA, although water levels in the Midwest have receded, there was little time for replanting. For nearly all of Midwest, 20 June was the final date to plant soybean crop fully covered by crop insurance.
As for palm oil, the Malaysian Palm Oil Board has forecast CPO output to rise 3% to 16.2 million tonnes this year while CPO production in Indonesia are projected to climb 6% to 14% to a range of 18.4 million to 19.8 million tonnes.After a bumper harvest in 1H2008, we expect CPO production in Malaysia remain softer in 2H. We reckon that the risk to prices is oversupply next year.
We would be coming out with a sector update soon. Our current recommendation on the sector is OVERWEIGHT. --amresearch
sector update 17 July 2008
More unpredictable weather
OVERWEIGHT
Unpredictable weather is expected to support vegetable oil prices in the coming six months. After the massive Midwest floods in the United States, it appears that the US Corn Belt could be facing a heat wave.
According to yesterday’s CBOT (Chicago Board of Trade) report, corn and soybean prices recorded gains after increasing market talks of potentially hotter and drier weather conditions. The gains in vegetable oil prices were in spite of another 3% fall in crude oil prices to US$135/barrel.
December corn prices rose 10.5 US cents to US$6.77/bushel while August soybean prices inched up 31 cents to US$15.73/bushel. Yesterday, the 3-month CPO (crude palm oil) futures price declined RM94/tonne to RM3,466/tonne.
It appears that CPO prices would continue to hover between the RM3,400/tonne to RM3,600/tonne range in the coming six months underpinned by unpredictable global weather pattern. If the output of corn and soybean falls below expectations, then this would sustain vegetable oil prices further. According to MPOB, the average monthly price discount between CPO and soybean oil expanded to 21% in June against 16% in May.
Currently, the US Department of Agriculture forecasts soybean production to rise 20% to 3,105 million bushels in 2008/09 while ending stocks are estimated to expand 40% to 175 million bushels.
In Malaysia, CPO production could soften in 2H2008 after a bumper harvest in 1H2008. Industry players have said that this production trend is the opposite of production pattern in other years when 2H is traditionally a stronger output period.
Malaysia recorded CPO production of 8.2 million tonnes in 1H2008, 23% higher than 6.7 million tonnes in 1H2007. For the full year, MPOB has projected the country’s CPO output at 16.2 million tonnes, 3% higher than last year’s 15.8 million tonnes.
We maintain our CPO price assumption of RM3,500/tonne for 2008 as it appears to be achievable based on current prices. In terms of stock recommendation, we like the bigger and integrated players such as IOI Corporation and KL Kepong. On the SGX (Singapore Stock Exchange), we favour Wilmar International and Indofood Agri-Resources. --amresearch
OVERWEIGHT
Unpredictable weather is expected to support vegetable oil prices in the coming six months. After the massive Midwest floods in the United States, it appears that the US Corn Belt could be facing a heat wave.
According to yesterday’s CBOT (Chicago Board of Trade) report, corn and soybean prices recorded gains after increasing market talks of potentially hotter and drier weather conditions. The gains in vegetable oil prices were in spite of another 3% fall in crude oil prices to US$135/barrel.
December corn prices rose 10.5 US cents to US$6.77/bushel while August soybean prices inched up 31 cents to US$15.73/bushel. Yesterday, the 3-month CPO (crude palm oil) futures price declined RM94/tonne to RM3,466/tonne.
It appears that CPO prices would continue to hover between the RM3,400/tonne to RM3,600/tonne range in the coming six months underpinned by unpredictable global weather pattern. If the output of corn and soybean falls below expectations, then this would sustain vegetable oil prices further. According to MPOB, the average monthly price discount between CPO and soybean oil expanded to 21% in June against 16% in May.
Currently, the US Department of Agriculture forecasts soybean production to rise 20% to 3,105 million bushels in 2008/09 while ending stocks are estimated to expand 40% to 175 million bushels.
In Malaysia, CPO production could soften in 2H2008 after a bumper harvest in 1H2008. Industry players have said that this production trend is the opposite of production pattern in other years when 2H is traditionally a stronger output period.
Malaysia recorded CPO production of 8.2 million tonnes in 1H2008, 23% higher than 6.7 million tonnes in 1H2007. For the full year, MPOB has projected the country’s CPO output at 16.2 million tonnes, 3% higher than last year’s 15.8 million tonnes.
We maintain our CPO price assumption of RM3,500/tonne for 2008 as it appears to be achievable based on current prices. In terms of stock recommendation, we like the bigger and integrated players such as IOI Corporation and KL Kepong. On the SGX (Singapore Stock Exchange), we favour Wilmar International and Indofood Agri-Resources. --amresearch
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