Singapore Strategy 2019 ~ Plantation Sector - RHB Invest 2018-12-14: Brace For Another Year Of Unexciting Prices

Singapore Strategy 2019 ~ Plantation Sector - RHB Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5)

Singapore Strategy 2019 ~ Plantation Sector - Brace For Another Year Of Unexciting Prices

  • Maintain NEUTRAL sector call with Wilmar International (SGX:F34) as Top Pick.
  • We reduce our CPO price assumptions for 2019-2020 to MYR2,200 from MYR2,500, and to MYR2,400 from MYR2,500. Although we believe CPO prices are likely to remain relatively unexciting in 2019, we think downside risks are limited from here on as demand is picking up, while inventory should start moderating in 1Q19.

Sudden fall in CPO prices unexpected.

  • CPO prices have surprised us and we believe the market as well on the downside, having fallen to a low of MYR1,717/tonne on 21 Nov from a relatively stable MYR2,000-2,200/tonne over the past four months, before recovering slightly to MYR1,800/tonne currently.
  • We believe the sudden drop in prices was due to the continued rise in CPO stock levels in Malaysia to 2.72m tonnes in October, and the decline in crude oil prices from a high of USD84/barrel a month ago to USD54/barrel currently.

CPO stock levels should start declining soon.

  • Going forward, as we enter the low season of production for CPO, we expect stock levels to start declining soon. That, and increased demand from biodiesel and India in 2019, should start to have a positive impact on prices come 1Q19. However, while we expect some form of price recovery in 1Q19, we do not expect CPO prices to jump significantly, given the fact that CPO stock levels will need some time to normalise (stock/usage ratios still at 13.8% vs historical mean of 9.6%).
  • In addition, external risks remain, in the form of trade war uncertainties, crude oil prices and trade policies by producing and consuming countries.

5 key factors to look out for in 2019:

  • We believe there are five key factors to look out for in 2019:
    1. Trade war ceasefire – Negative. China buyers will return to buying soybeans from the US for the next three months, reducing CPO demand;
    2. Logistics issues being resolved in Indonesia and Indonesia’s new export duty structure – Mixed. While the resolution of the logistics issue in Indonesia would be positive for CPO prices in Indonesia and therefore positive for pure upstream players, the new export duty structure would reduce downstream players’ margins;
    3. Crude oil prices and biodiesel demand – Positive, but depending on gasoil prices. Rising biodiesel mandates in Malaysia and Indonesia can raise CPO demand by 3-4m tonnes pa. However, if gasoil prices fall by another USD5.60/barrel, subsidies would again be required;
    4. India’s impending reduction of import duty on CPO - Positive;
    5. Potential weather extremities in the form of El Nino in 1Q19 – Positive for prices.

Another unexciting year for CPO prices.

  • Overall, we believe this mixed bag of key factors will result in another relatively lacklustre year for CPO prices.
  • On the whole, while we expect demand for both the eight vegetable oil complex and the 17 oils & fats complex to improve, thus lowering stock/usage ratios in 2019, we believe stock/usage ratios need to be lowered to at least historical levels before we see a more significant price improvement. We reduce our CPO price forecasts for 2019-2020 to MYR2,200/tonne from MYR2,500, and to MYR2,400/tonne from MYR2,500.
  • All in, our earnings forecasts have been lowered by an average of 7-12% for FY19-20.

We maintain our NEUTRAL recommendation on the sector.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 3.580 SAME 3.580