WILMAR INTERNATIONAL LIMITED (SGX:F34)
BUMITAMA AGRI LTD. (SGX:P8Z)
FIRST RESOURCES LIMITED (SGX:EB5)
GOLDEN AGRI-RESOURCES LTD (SGX:E5H)
Plantation – Regional - Going Through A Slow Recovery
- 2018 was a painful year for the palm oil industry which posted its second consecutive year of underperformance. CPO prices corrected by 18.3% for 2018 on the back of the unexpected bumper crops from Indonesia. 2019 is expected to be a recovery year but the recovery will be slow on:
- increased supply from high volume of carry-over inventories from 2018;
- high global vegoil supply; and
- demand could take a hit on weakening crude oil prices.
- Maintain MARKET WEIGHT.
WHAT’S NEW
Good start to 2019.
- Crude palm oil (CPO) prices started the year on a positive note as India’s import duty cut on palm products has led to a more positive demand outlook. CPO three-month futures closed up by RM43 to RM2,164/tonne on 2 Jan 19.
Gradual price recovery expected in 2019.
- 2018 ASP for CPO is estimated at RM2,250- 2,270/tonne (11M18: RM2,275), lower than our expectation of RM2,400. For 2019, we are expecting CPO prices to recovery gradually with higher prices in 2H19 as inventories are drawn down on lower production growth for 2019.
- We are now expecting CPO prices to average RM2,350-2,400/tonne for 2019 vs our estimate of RM2,500/tonne previously. This revision has already been factored into our earnings forecasts post 3Q18 results.
Indonesia’s logistical problems ease; leads to more timely shipments.
- The disappointing 3Q18 results were partly attributed to lower sales volumes due to shipping congestions which slowed down deliveries/pick-ups. Based on our channel checks, the congestions started to ease in early-Dec 18 as the Indonesian government had cut down biodiesel delivery ports to 25 ports from 120 ports previously. The waiting time for shipments reduced significantly from 6 weeks to 2-3 weeks. Thus, 4Q18 should see Indonesia companies reporting higher sales volumes.
ACTION
Maintain MARKET WEIGHT.
- The plantation sector is trading close to -1SD of its five-year mean, which could have factored in the weaker results in 3Q-4Q18 due to the low CPO ASP. We reckon CPO prices could have hit a bottom in late-18 and further downside risk is limited.
Buying opportunity after selldown.
- Plantation stocks corrected sharply after the announcement of poor 3Q18 results and with investors factoring in another quarter of poor results in 4Q18. Indonesia-based companies should report a relatively better performance for 4Q18 given that the weak ASPs would have been offset by higher selling volumes with the easing of the logistical issues.
- We reiterate BUY on BUMITAMA AGRI LTD. (SGX:P8Z) which is likely to benefit from higher sales volumes and the temporary n of the export duty in Indonesia should translate into better selling prices for upstream players.
ESSENTIALS
CPO prices to recover on slow production growth.
- CPO prices are expected to recover in 2019 from the low of RM1,952.50/tonne as at 31 Dec 18 on the back of slower production growth. Global palm oil production is expected to grow by 5.1% y-o-y in 2019 vs 6.1% y-o-y for 2018 (2017: +14.8% y-o-y).
- The slower growth would mainly be due to a slower production increase in Indonesia with palm trees likely to enter their low production year after two consecutive years of bumper crops. Production growth will also be affected by fewer new mature areas in Indonesia as new planting slowed down substantially after 2014.
- We are expecting a greater impact on Indonesia’s production growth in 2021/22 as a result of the sharp drop in new planting due to more stringent, sustainable practices and requirements.
Recovery of prices also highly dependent on other edible oils.
- Despite lower production from palm oil, global stock-to-usage ratio for the 17 major oils and fats is still relatively high. In addition, a high oilseed stock-to-usage ratio also poses a risk to global edible oil supply, ie a significant increase in demand for oilseed meals will lead higher oilseed crushing (especially soybean) and thus more edible oils supply (by products from crushing of oilseeds).
Finally, positive news from India.
- India has cut import duties on CPO from 44% to 40%, duties on refined palm oil of Malaysian origin to 45% and that for palm oil of Indonesian origin to 55%. This reduction was an expected move under the Comprehensive Economic Cooperation Agreement entered into between India and Malaysia. India's effective import duties on CPO remains 5.5pts higher than that for other crude edible oils.
- Overall, this is positive for palm oil’s market share in India which is the world largest edible oil importing country and top consuming country for palm oil.
SECTOR CATALYSTS
Weather disruptions.
- Rainfall during this year’s monsoon season was well below the norm and most areas experienced a relatively hot and dry December which is very usual. This is in-line with the El Nino warnings by both weather forecast centres, ie US-based NOAA and Australia Bureau of Meteorology (ABM). Based on NOAA’s updates dated 31 Dec 18, the El Niño is expected to form and continue through the Northern Hemisphere’s winter of 2018-19 (~90% chance) and through the spring (~60% chance). The last strong El Nino in 2015 led to a 5.6% drop in global palm oil production.
- However, the severity of the El Nino is yet to be confirmed; based on past occurrences, the probability of another strong El Nino is low. Bad weather caused by the El Nino will need to severely hit soybean production areas. If this does not happen, the price impact could be short and muted as seen in 2015/16. Weak palm oil production has been offset by consecutive years of strong soybean production.
ASSUMPTION CHANGES
Lowering CPO price expectations.
- 2018 ASP for CPO is estimated at RM2,250- 2,270/tonne (11M18: RM2,275), which is lower than our expectation of RM2,400.
- For 2019, we are expecting CPO prices to recovery gradually with higher prices in 2H19 as inventories are drawn down on lower production growth for 2019. We are now expecting an average CPO price of RM2,350-2,400/tonne for 2019 vs RM2,500/tonne previously
RISKS
Weakening crude oil prices.
- Biofuel demand is currently close to 30% of global palm oil consumption. Thus, weakening crude oil prices could put this demand at risk.
Changes in government policies,
- especially those from importing countries. Main markets to monitor would be Europe (on biofuel policy), India (import duty and base price) and Indonesia (biodiesel mandate).
Leow Huay Chuen
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-01-03
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