Navigate Singapore 2019 ~ Commodities - CGS-CIMB Research 2018-11-29: NEUTRAL


Navigate Singapore 2019 ~ Commodities - NEUTRAL

Positive Trends

Strong recovery in FFB yields in 3Q vs. 2Q.

  • All three players - Golden Agri Resources (SGX:E5H), Wilmar International (SGX:F34) and First Resources (SGX:EB5) under our coverage reported higher FFB output growth in 3Q18, driven by a recovery in yields post El Nino and improving age profile for some.
  • Golden Agri posted a 22% q-o-q and 4% y-o-y rise in its FFB output in 3Q18 and 9M18, respectively.
  • Wilmar posted a 3% q-o-q / 6% y-o-y rise in FFB output from its estates in 3Q18/9M18 as estates in Malaysia registered slower output growth.
  • Among the three, First Resources delivered the strongest FFB output growth of 25% and 20% for 3Q18 and 9M18, respectively, due to its younger age profile. The higher FFB yields coupled with weaker rupiah helps lower the cost of production for planters in US$ terms.

Higher biodiesel mandates to help boost demand for palm oil.

  • Indonesia has started to enforce a stricter mandatory use of diesel containing 20% of biodiesel in Indonesia to help rein in its fuel bill and cushion the impact on its economy of a currency crisis and higher oil prices. This is expected to raise Indonesia’s biodiesel consumption from a projected 4m kls in 2018 to 6m kls in 2019. This is positive for CPO prices as the additional biodiesel usage will boost demand for palm oil.

Negative Trends

Rising palm oil stocks have put pressure on CPO prices.

  • CPO prices have declined 31% YTD to RM1,716/tonne (US$408/tonne) as at 21 Nov, due to rising stocks in Malaysia and Indonesia. The lower ASPs for palm products have dampened the profitability of CPO producers but this trend is positive for downstream processors of palm products due to lower raw material costs.

Slower demand growth from key customers.

  • In Mar this year, India raised the import duties on CPO and refined palm oil to 44% and 54%, respectively. This has raised the costs of palm-based cooking oil in India. This, coupled with the weaker rupee, resulted in slower demand growth for palm oil in India.

Looking to 2019

Projects CPO price to recover in 2019.

  • We project CPO price to recover from current levels in 2019, as we expect higher biodiesel usage by Indonesia as well as improved demand for palm oil due to its current competitive pricing against other edible oils.
  • The other bullish factors for CPO price include potential El Nino development which could result in lower CPO supply, if key palm oil regions are impacted by adverse weather development and talk that India could lower export duties on 1 Jan 2019. Higher palm product prices will boost profit margins for upstream plantation companies as their costs of production are relatively fixed.
  • We expect average CPO prices to fall 19% y-o-y to RM2,260 per tonne in 2018 before rising 6% y-o-y to RM2,400 per tonne in 2019.

Potential cut in export levy for CPO?

  • It was reported that Indonesia Palm Oil Farmers Association (Apkasindo) had requested for a reduction in export levy rates for CPO due to the current high stocks situation in Indonesia. Currently, Indonesia imposes a US$50 per tonne export levy on CPO.
  • We view any plans by the government to lower the palm oil export levy as positive for CPO producers as it will increase the local selling prices of CPO in Indonesia.

Potential impact of 25% import duties on US soybeans in China.

  • China has slapped a 25% import tariff on soybean imports from US. This has led China-based soybean crushers to source more soybeans from other South American soybean producers. However, this could result in higher soybean prices and its related products in China due to additional taxes or transportation costs and these could be passed on to consumers.
  • The higher prices of soybean meal could lead to lower demand and crushing activities and this could indirectly benefit palm oil.
  • Wilmar and Golden Agri are involved in soybean crushing in China and could be affected by the tariff, if demand for soybeans in China is affected. However, this could be partially offset by higher palm oil prices.

Stock preference

  • We like First Resources (Rating: ADD, Target Price: S$2.08) and Wilmar (Rating: ADD, Target Price: S$4.10).
  • We like First Resources for its young estates profile (c.11 years) which offers high potential output growth.
  • We also like Wilmar as we expect the listing of its China operations, which could be worth more than Wilmar’s current market cap of US$15bn, to catalyse its share price. Stronger y-o-y 3Q18 earnings from better crush and refining margins should also re-rate the stock.
  • Golden Agri (Rating: REDUCE, Target Price: S$0.23) is our top short as we are concerned about its weaker plantation earnings and unexciting output prospects given its older estates profile (16 years).

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-29
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