2019 Outlook & Strategy ~ Plantations - DBS Research 2018-11-29: Bottoming Out, Poised To Rebound

2019 Outlook & Strategy ~ Plantations - DBS Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)

2019 Outlook & Strategy ~ Plantations - Bottoming Out, Poised To Rebound




Outlook


FY19/FY20F CPO price forecast of US$610/US$611 per MT.

  • We foresee higher CPO prices in 2019 on the back of:
    1. stronger demand from CPO restocking by major importing countries amid current low price levels – countries such as India need imported CPO to meet their domestic edible oil demand;
    2. the brief dip in global supply from declining Indonesian output after a bumper 2018 crop; and
    3. better biodiesel economics due to CPO’s price differential with crude oil price.
  • We expect CPO price to recover to US$610 per MT in 2019 before reaching US$611 per MT in 2020.

CPO’s affordability vs. soy oil to attract more demand.

  • 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. Since November, soybean oil-CPO price discount widened to US$140-150 per MT, above their 3-year historical average of US$100-US$110 per MT.

CPO stocks are trading at attractive levels.


  • We continue to prefer Indonesia-and Singapore-listed planters for their stronger output growth prospects, solid earnings and undemanding valuations.
  • We believe selected counters First Resources, Bumitama Agri and Wilmar International remain undervalued with PE multiple at below their 10-year average PE multiple of 15.5x.

Successful implementation of Indonesia’s biodiesel mandate is potential catalyst.

  • The difference between CPO and crude oil price is attractive at this point, 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 7-8m MT of CPO demand for biodiesel blending (compared to our base case annual biodiesel volume of 4m MT), and potentially driving CPO price to approach US$650 per MT.

Favours companies with yield expansion potential, and savvy cost management.

  • We favour planters with younger tree age profiles for their higher volume growth. Volume and yield expansion can benefit margins as long as costs are well-managed, we thus believe that efficient planters can enjoy another leg of earnings expansion beyond a CPO price recovery.
  • 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.


Risks


Weather.

  • We believe the primary short-term risk for CPO prices is driven by weather. The El Nino phenomenon has a 55%65% chance of occurring in 2019, according to several media reports.
  • La Nina will affect rain density and hinder the pollination of male and female fruits. With the potential for lower-than-expected output, there is upside risk to our CPO price assumption.

Demand factor.

  • The still high India import taxes and better-than-expected domestic oilseeds harvest may hinder significant CPO price expansion. On the other hand, stronger-than-expected Indonesian biodiesel absorption may drive CPO prices beyond our expectation.

Stronger-than-expected Indonesian smallholders’ output expansion.

  • Output is a key variable for determining CPO prices but Indonesia seems to lack accurate data disclosure. Stronger-than-expected smallholder estate yields moving forward may underpin a robust CPO output expansion in Indonesia that could trump output forecasts.


Valuation & Stock Picks


CPO stocks with volume expansion prospect.

  • Amid the lack of significant catalysts for 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. Thus, we maintain Bumitama Agri (SGX:P8Z) and First Resources (SGX:EB5) as our picks in 2019 for Singapore-listed CPO companies.

Efficiency seeker: Wilmar International.

  • We also like Wilmar International (SGX:F34) 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 WIL to remain reasonably profitable in various commodity price cycles.

Growth potential, priced at a discount.

  • Our top picks of Bumitama Agri, First Resources and Wilmar International are trading at 10.5x, 12.3x and 13.5x PE, respectively, below their average 10-year average PE of 15.5x.
  • We believe the market has yet to price in the potential re-rating catalyst of higher yields which can keep their cost per hectare low and provide another earnings growth driver beyond a CPO price recovery.
  • Refer to the PDF report attached for peers valuation comparison table. 





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-11-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.590 SAME 3.590
BUY MAINTAIN BUY 0.850 SAME 0.850
BUY MAINTAIN BUY 1.970 SAME 1.970
HOLD MAINTAIN HOLD 0.190 SAME 0.190





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