Maintain neutral: The government expects crude palm oil (CPO) production to come down by 15% to 20% due to the severe flood situation in the East Coast. A total of 7,500 smallholder estates covering 24,000ha and 230 oil palm estates spanning 160,000ha were affected. As a result, CPO inventories were also expected to be reduced to two million tonnes from 2.2 million tonnes. It unexpectedly disrupted the CPO supplies in the short term. The worst flood in the East Coast due to the monsoon season affected fresh fruit bunch (FFB) harvesting and milling activities as well as transportation.
The flood situation in Kelantan, Terengganu, Pahang, Perak and Johor, which collectively account for 40.8% of Malaysian oil palm plantation, improved last week. These five states also contribute about 44% of total CPO production in Malaysia. We think that it could at least take one to two months for the production to normalise.
In contrast with other plantation counters, Felda Global Ventures Holdings Bhd’s (FGV) share price had unexpectedly tanked 34% over the last month despite the recovery of CPO prices. Besides selling pressure from two major shareholders, the Employees Provident Fund and Kumpulan Wang Persaraan, the group’s earnings were also clouded by the exposure of plantation land to flood-hit areas. This is likely to affect its upcoming quarterly results. As of Dec 29 last year, the group estimated a total loss of RM21 million due to flood damage and loss of FFB production totalling 11,000 tonnes, which is about 0.2% of estimated annual production.
Based on the current share price, the company is trading at only 16 times to our financial year 2015 (FY15) forecasts compared with industry average of 18 to 19 times.
CPO prices are likely to recover further driven by lower CPO inventories for December 2014. They have recovered more than 7.5% since early December. We think that they could easily go above RM2,400 per tonne in the short term. — PublicInvest Research, Jan 2
This article first appeared in The Edge Financial Daily, on January 5, 2015.