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Slowdown in crude palm oil output keeps First Resources on 'neutral'

Samantha Chiew
Samantha Chiew • 2 min read
Slowdown in crude palm oil output keeps First Resources on 'neutral'
SINGAPORE (Dec 14): RHB is maintaining its “neutral” recommendation on First Resources with a target price of $1.86.
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SINGAPORE (Dec 14): RHB is maintaining its “neutral” recommendation on First Resources with a target price of $1.86.

While RHB continues to expect CPO (crude palm oil) output to grow, especially in Malaysia where recovery has been slower, much of this has already been reflected in CPO prices.

In December, CPO prices dropped to a low of RM2,400/tonne ($793/tonne) from a high of RM3,348/tonne in February.

RHB believes CPO prrices are likely to remain range-bound at RM2,400-2,700/tonne.

In a Wednesday report, RHB analysts say, “We expect the growth in CPO output in both Malaysia and Indonesia to slow down in 2018, from the estimated 12% and 21% y-o-y jump respectively in 2017.”

Given the seemingly delayed CPO production peak season in Malaysia this year, it is likely that part of the peak season would overflow into 1Q18. This may result in Malaysia recording CPO output growth of 5-7% y-o-y in 2018F.

Over in Indonesia, it seems that CPO output growth has hit its peak in Oct/Nov 2017. This means that the production cycle has somewhat normalised, which could result in a CPO output growth of 3-5% y-o-y for 2018F.

Moreover, most weather models acknowledge that if the current progression continues, 2017-2018 may be considered a La Niña event.

There is a 75% chance of La Niña occurring this month but climate models suggest that it is likely to be weak and short-lived, if it occurs.

“Nevertheless, we believe a mild La Niña would still have an impact on vegetable oil supply (although somewhat muted). This could affect sentiment and, therefore, prices positively by 8-12%, based on historical events,” says RHB.

RHB believes that even a mild La Niña will provide support for CPO prices in 2018, while production may face a cyclical downturn in 2019. Hence, boosting prices again.

As at 11.23am, shares in First Resources are trading at $1.85 or 1.86 times FY18 book with a dividend yield of 3.1%.

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