SINGAPORE (Dec 18): DBS Research has an “overweight” rating on the Singapore plantation sector with Bumitama Agri, First Resources (FR) and Wilmar as its top “buy” picks.
“Amid the lack of significant catalysts for crude palm oil (CPO) prices to rally to above our base case forecast next year, we still prefer companies with strong organic CPO volume growth prospects that can help boost profitability,” says lead analyst William Simadiputra in a market focus report.
“We believe the market has yet to price in the potential rerating catalyst of higher yields which can keep their cost per hectare low and provide another earnings growth driver beyond a CPO price recovery,” he adds.
In particular, the analyst likes Wilmar for its capability to cope with varying commodity price dynamics in the face of an escalating US-China trade war. Improving its processing plant efficiency will also allow the group to remain reasonably profitable in various commodity price cycles.
DBS has a target price of 85 cents, $1.52 and $3.59 for Bumitama, FR and Wilmar, respectively.
On the outlook, the analyst foresees higher CPO prices in 2019 on the back of stronger demand from CPO restocking by major importing countries amid current low price levels; the brief dip in global supply from declining Indonesian output after a bumper 2018 crop; and better biodiesel economics due to CPO’s price differential with crude oil price.
The CPO price is expected to recover to US$610 per MT in 2019 and US$611 per MT in 2020.
“We believe current CPO price discount against soybean oil will not sustain. The widening price discount will attract more opportunistic CPO buying action among the price sensitive buyers/traders,” says Simadiputra.
In addition, the analyst prefers Indonesia- and Singapore-listed planters for their stronger output growth prospects, solid earnings and undemanding valuations.
Currently, the difference between CPO and crude oil price is attractive, as reflected in the reignition of Indonesia’s 20% bio content (B20) mandate in September.
“We believe that if this programme is fully and successfully implemented, it could result in up to 7-8 million MT of CPO demand for biodiesel blending (compared to our base case annual biodiesel volume of 4 million MT), and potentially driving CPO price to approach US$650 per MT,” says the analyst.
The analyst also prefers planters with younger tree age profiles for their higher volume growth.
He believes that efficient planters can enjoy another leg of earnings expansion beyond a CPO price recovery, as volume and yield expansion can benefit margins if costs are managed properly.
“We also like planters with a strong balance sheet, which would allow them to take advantage of any opportunistic brownfield acquisitions, expand value chains downstream, and/or to diversify their businesses to other crops,” adds Simadiputra.
However, some of the risks to the sector include the weather, demand factor and stronger-than-expected Indonesian smallholders’ output expansion.
As at 2.20pm, shares in Bumitama, FR and Wilmar are trading at 62 cents, $1.57 and $3.10, respectively.
