Own palm oil production fell by 1.68% during the first 5 months of 2013 as oil palms entered a low yield cycle in Indonesia. Sipef’s volumes recovered in April-May (+1.73% y/y) following the 4.0% decline in 1Q13 thanks to a sharp improvement at Hargy Oil Palms (Papua New Guinea) and the growing contribution of the young plantations UMW/TUM. In North Sumatra (Tolan Tiga) volumes declines decelerated from -8.5% in 1Q13 to -0.91% in May-June. The extraction rate was slightly lower due to the high rainfall. Management expects a pick-up in production at Tolan Tiga as from 4Q13. At Agro Muko (Bengkulu province) own palm oil production fell by 9.8% in May-June following the 7.2% drop in 1Q13. Agro Muko’s harvests are set to remain relatively weak in the coming months with improving trends toward the end of the year. Hargy Oil Palms’ volumes rose by 9.63% in April-May following the 4.8% drop in 1Q13 when production was hampered by exceptionally wet weather conditions.
Sluggish palm oil price outlook
Palm oil prices have recovered somewhat as falling production volumes and rising demand for bio fuels led to lower stock levels. Demand remains relatively weak however. Sipef’s management does not expect any price increases over the next few months as the prospects for soya bean harvests in the US are good. The USDA expects US soybean production to rise by 12% in 2013/14. Global soybean production is set to rise by 7%.
Slightly lower rubber production and uninspiring price outlook
Sipef’s own rubber production declined by 0.64% during the first 5 months of 2013. The drop was severe at Galley Reach (Papua New Guinea) (-16.91%) due to rainfall. Large inventory levels in China and macro-economic headwinds in Europe have a negative impact on demand and prices.
Slow progress in Musi Rawas
After obtaining an additional third licence, there is a potential of 24,311 hectares to be developed, of which management expects at least half to be converted into palm and rubber operations. So far the local inhabitants have been compensated for slightly more than 2,500 hectares and planting started early June.
Our forecasts remain unchanged: we count on a 17% drop in net profits (before IAS 41) this year. Sipef has sold forward 68% of its expected production volumes at an average price of $ 923/tonne CIF Rotterdam. Our forecasts for this year are based on an average price of $ 900/tonne. Sipef has also sold 55% of the expected rubber production at $ 2,959/tonne (our FY13 estimate is based on $ 3,000). Given the sluggish outlook for production volumes in Sumatra in 2Q13 and 3Q13 and the lack of positive palm oil and rubber price triggers in the coming months, we lower our target price from € 68 to € 64. We believe that palm oil prices and Sipef’s share price have bottomed out. We nevertheless stick to our HOLD rating because we do not expect any positive share price triggers in the short term.