MP Evans: AGM Statement
Indonesian palm oil producer, MP Evans (MPE LN), has announced a trading update alongside its AGM, which is being held today, for the first five months of 2016.
• Group FFB Crop (majority-owned estates): 142,400t, -7.6% YoY (2015: 154,100t)
• Newer Projects (Kalimantan & Bangka) FFB crop: Bangka, “-19% YoY”, Kalimantan, “-6% YoY”, (2015: 87,000t)
• Established Projects (Sumatra) FFB crop: Not disclosed (2015: 67,100t)
• Associated companies FFB crop (PT Agro Muko (37%-owned), PT Kerasaan Indonesia (38%-owned): +3% YoY (2015: a fall of 15% YoY)
• Musi Rawas new project plantings: 700ha planted, 1,700ha now planted in total, including smallholder areas. (2015: 350ha planted)
VSA Comment
Although a fall of 7.6% for the first five months of the year is not positive, it needs to be seen in the context of a sector-wide El Niño-inspired slowdown (REA Holdings (RE/ LN) -18% YoY, First Resources (FR SP), -18% YoY, Genting (GENT MK) -11% YoY, DSN Group (DSNG IJ), -15% YoY).
It is clear MPE has outperformed its peers in this regard, with the yield suppression offset somewhat by its young estates moving up the yield curve. However, it is also clear that production has suffered more in Q2 than in the first three months of the year (as MPE had previously warned it would be), when MPE reported its overall crop level was +3% YoY (+9% YoY in Kalimantan, -7% Bangka, flat in Sumatra).
As today’s Malaysian palm oil stocks released showed, things are definitely getting tighter in the palm oil market. The impact of El Niño is continuing to be felt with a third month of double digit YoY production decreases for the Malaysian sector recorded last month. April saw CPO production in Malaysia fall by almost 25% YoY, in-line with what many producers in the region have been reporting to us.
Malaysian palm oil stocks are now at the lowest level since March 2011, when the CPO price in Rotterdam was more than US$1,100/t. It is currently a little over US$700/t. This might suggest a CPO price increase might be around the corner.
However, despite recent strong moves in the soybean complex, the soybean oil premium over CPO is still fairly narrow, which will limit any further CPO price upside unless soybean oil continues to strengthen (possibly as a result of a potential La Nina impact in the US?).
This means that the typical trade-off between lower production but higher prices is not holding true for producers this year. Planters are hoping for a significant bounce-back in CPO production in the peak period (September to December) as the effects of El Niño wear off, in order to boost full-year production levels. However, this will need to be even stronger than we saw last year and without such an occurrence, production for many producers could stay well below last year’s levels.
Although we feel REA is progressing well and note the recent DSN deal as providing more than just a financial benefit, we still favour MPE out of the London-listed producers. In particular, we feel that the incoming cUS$80m from the NAPCo disposal to support its capex programme and to acquire new sustainable land puts it at a significant advantage over industry peers, many of whom are highly leveraged.