It has been a topsy-turvy 2020 for palm oil stocks. What started out as a relatively promising year for crude palm oil (CPO) prices in December 2019 and January on the back of weaker 4Q2019 output and commencement of Indonesia’s B30 biodiesel mandate — a blend of 30% palm oil in regular diesel fuel — quickly turned into a nightmare following the Covid-19 pandemic. CGS-CIMB Research head Ivy Ng noted that palm oil prices fell from over RM,3000/tonne ($984.02/tonne) to below RM2,000/tonne in March, which triggered a correction of palm oil stocks — including those listed in Singapore.
However, as China and India began to normalise their economies, imports began creeping back upwards, spurring a recovery in CPO prices, which is seen to continue to the lag effect of 2019’s El Nino, says DBS Vickers Securities analyst William Simadiputra. Dry weather from June 2019 to September 2019 affected production 12 months ahead in 2020, which caught out buyers hoping to buy at low prices in 2H2020 on the expectation of higher production. With low buyer stockpiles and low seller supplies, CPO futures reached an eight-year high of RM3,420/tonne on Nov 19, with the Jakarta-based analyst expecting higher prices to remain the case for some time.
But CPO prices going into the new year could decline due to a low-to-moderate intensity La Nina effect increasing rainfall in the last three months of the year. Given the Meteorological, Climatological and Geophysical Agency of Indonesia expects 55% of Indonesia to experience higher rainfall than average, Fitch Solutions sees higher palm oil fruit yields and CPO output in 2021, resulting in lower prices. They expect CPO prices to fall from an average of US$600/tonne ($806.14/tonne) in 2020 to US$560/tonne come 2021.
Conversely, however, Ivy Ng and Nagulan Ravi of CGS-CIMB found that six of the last nine La Nina events in Malaysia in fact saw higher prices. “We are of the view that the ongoing La Nina event could disrupt the supply of soybean and other oilseeds in 2021, leading to buyers switching to palm oil, which would be favourable for CPO prices,” they told the Virtual Palm and Lauric Oils Price Outlook Conference & Exhibition 2020. Ling Ah Hong, director at Malaysian research firm Ganling, sees CPO prices most likely reaching RM3,100/tonne in 1H2021 and RM2,200/tonne in 2H2021.
In any case, Simadiputra points to structural rather than cyclical factors as having a more significant impact on CPO prices — especially in Indonesia. Output in the long-run could be hampered by poor fertiliser application in the last three years as low-yield planters sought to cut costs amid a downward trend in CPO prices; the effects of an imminent low productivity cycle will likely become apparent over the next 12–18 months.
Yet while plantation stocks are typically strongly correlated with CPO, only Wilmar International’s share price has a meaningful gain while Bumitama Agri, First Resources and Golden Agri-Resources remained relatively close to prices at the start of Covid-19 year to date. Simadiputra believes markets are waiting to see if the rise in CPO does indeed translate into higher earnings and by extension, higher dividends. Investors are also unsure if Indonesia will continue its B30 mandate as CPO prices rally faster than crude oil. They also fear higher Indonesian export levies too, he says.
But the DBS analyst thinks that export levies will not unduly detriment the profits of the planters. “Our view is that currently, the Indonesian spot market for palm oil is already quite favourable for the palm oil planters,” he tells The Edge Singapore. Dadan Kusdiana, director general of Indonesia’s energy ministry, also said that Indonesia would likely retain B30 next year despite funding challenges. Earnings momentum on the higher CPO price is therefore likely to remain into 2021, though floods from the higher rainfall could potentially disrupt palm oil production.
Buying into liquid gold
Leading the pack for plantation stocks has been Wilmar, which has just recently completed the listing of its China-based subsidiary Yihai Kerry Arawana Holdings (YKA) on the Shenzhen Stock Exchange ChiNext Board on Oct 15.
However, the expected jump in Wilmar’s share price upon YKA’s listing did not sustain. The company’s management, according to CGSCIMB’s Ng, was surprised that its share price did not react more positively. As such, the discrepancy of the market value is stark. Post-listing, Wilmar owns 90%-owned YKA, which now commands a market cap of US$42 billion. The parent company, in contrast, is worth around US$20 billion. Ng, citing Wilmar, attributes this to concerns about potential overhang from the placement of shares by Archer-Daniels-Midland Co (ADM), a major Wilmar shareholder.
Admittedly, Wilmar’s planned special dividend of 6.5 cents (equivalent to 15% of YKA’s IPO proceeds) was lower than expected, given its potential capex savings, notes Maybank KimEng analyst Thilan Wickramasinghe. But he expects a high final dividend on the back of strong 2HFY2020 ended June 30 recovery, with an estimated payout ratio of 50% in addition to the special dividend delivering a robust 7.3% dividend yield.
Wilmar has been undertaking a series of share buybacks throughout November. Chairman Kuok Khoon Hong has been adding more shares to his already considerable holdings too. This year, Wilmar might beat its previous record profit of US$1.7 billion and earnings might hit a 10-year high if it can deliver a final net profit of around US$554 million in 4QFY2020, estimates Ng of CGS-CIMB.
Bumitama Agri also looks promising. Simadiputra believes that markets have yet to price in the earnings rebound it experienced in 3Q2020 of IDR190 billion ($17.96 million) which amounts to 0.7% y-o-y and 6.5% q-o-q. Arriving on the back of stronger than expected sales volume and CPO prices, the DBS analyst believes that Bumitama should finish strong in 4Q2020 before growing 4.4% y-o-y in 2021 and 8.9% y-o-y in 2022. Yet, Bumitama is trading with a P/E of 12.5 as it rebounded from one standard deviation below its five-year multiple recently.
“The better q-o-q and y-o-y earnings were mainly buoyed by higher selling prices. CPO sales volumes had increased by 6% q-o-q , mainly due to better fresh fruit bunch (FFB) volumes from both external and internal production, which had increased by 11% q-o-q,” write UOB KayHian analysts Jacquelyn Yow and Leow Huey Chuen. With CPO prices trading high at US$750–800/tonne, the duo see strong earnings performance from Bumitama ahead.
Fear of La Nina flooding, however, has seen RHB’s Singapore Research team cutting FFB pricing growth predictions from 7–9% to 6-7% for FY2021–2022, thereby trimming FY2020–2022 earnings predictions by 7–9%. But Yow and Leow are more optimistic about Bumitama’s earning prospects amid higher rainfall. “Bumitama’s operations had not been affected by the floods and we reckon that this might have been due to the improved drainage system and water management that Bumitama implemented in their estates since five years ago,” they report.
Simadiputra also likes Bumitama as its policy of consistently maintaining nucleus CPO yield at above four million tonne per hectare. “Bumitama is one of our top “buys” in this universe due to its consistent CPO yield which supports its profitability. We believe that it is one of the best proxies for recovery of CPO prices in the market,” he says. First Resources has also performed well, recording a 41% jump in 9MFY2020 ended Sept 30 reported net profit of US$80 million above Ng and Ravi of CGS-CIMB’s full-year prediction. Ong Chee Ting of Maybank KimEng considers
First Resources as his top “buy” among large caps. He likes its integrated model, strong management and low production costs. In contrast, while Golden Agri has returned to core net profit in 3QFY2020 ended Sept 30 after a loss-making 1HFY2020, its prohibitive 30 times FY2021 P/E valuation has RHB’s Singapore Research team urging caution.
Green is the colour of money
In the wider agricultural space, agri-food company Japfa recorded a strong 9MFY2020 ended Sept 30. Its Patmi grew more than five times to US$130 million in 9MFY2020 from US$22.4 million in 9MFY2019, while its core Patmi without forex trebled from US$47.5 million in 9MFY2019 to US$140.8 million in 9MFY2020. After selling 25% of its China dairy farming operations, the company’s balance sheet has further strengthened with its net debt-to-equity ratio coming in at 0.5.
This strong performance has come despite headwinds affecting its Indonesia poultry operations, says DBS analysts Andy Sim and Alfie Yeo, while its dairy and swine operations in China and Vietnam are doing well. “We believe the market is underappreciating its geographical diversification, which has shown its benefits this year on the back of the impact of Covid-19.” they write, commending also Japfa’s resilience against an African Swine Flu outbreak in 2019. Its P/E ratio of 6.4 is currently well below its historical average, implying a potential bargain buy.
Japfa is ending the year with a bang. On Dec 7, it announced the sale of 80% of Greenfields Dairy Singapore, its dairy business in Southeast Asia, to TPG and Northstar Group for US$295 million, booking a gain of US$213.7 million. As it keeps the remaining 20%, Japfa plans to reward shareholders with a special dividend of 10 cents per share
