FIRST RESOURCES LIMITED (SGX:EB5)
BUMITAMA AGRI LTD. (SGX:P8Z)
Agricommodities Sector Outlook - An Opportunity To Trade In 2Q19
- Analyst sector view: NEUTRAL
Slowing output in 2019 will help strengthen CPO price
- Growth will be non-linear as we think trees will enter into biological rest after the good harvest in 2017-18. We anticipate the palm oil output growth in 2019 will slow, particularly from 2Q19. This will help drawdown the high stockpile brought forward from end-2018, which in turn will allow the CPO price to strengthen and average a higher MYR2,350/t in 2019 (2018A: MYR2,235/t).
- We advocate a tactical trading strategy in 2Q19 based on a recovering CPO price, although our 12M Neutral view on the sector is unchanged.
Downside floored by high fossil fuel price
- Indonesia’s B20 implementation, a key demand driver, will soak up an additional ~2m MT of palm oil in 2019. Vastly improved infrastructure in Indonesia coupled with a well-endowed CPO Fund in excess of USD1b (as at end-2018) to fund the blend will ensure it success.
- Furthermore, the present favourable palm oil-gasoil (POGO) spread will even help boost discretionary demand, especially during the upcoming summer months in the Northern Hemisphere.
Key risks to our view
- Key risks to the sector and companies are:
- weather anomalies resulting in poorer-than-expected output growth;
- lower-than-expected CPO price achieved;
- negative policies imposed by import countries;
- unfriendly government policies in producing countries;
- sharply lower crude oil prices which makes palm biodiesel demand not viable; and
- weaker competing oil prices (like soybean and rapeseed).
Valuations – Good buying opportunities
- Interest appears to be returning to the Agricommodities sector of late. Recent conditional cash offer to privatize INDOFOOD AGRI RESOURCES LTD. (SGX:5JS) is a testament that valuations have bottomed and values are emerging.
- FIRST RESOURCES LIMITED (SGX:EB5) and BUMITAMA AGRI LTD. (SGX:P8Z) are both trading near 1SD below their historical means. This presents good buying opportunities for long only funds as we remain positive on the industry’s medium-to-long term outlook because of an overall slowdown in new planting and the need to accelerate replanting of some older trees, which will likely slow FFB growth forecasts in 2020-21.
First Resources (FR) is our top plantations pick
- First Resources is our top pick as it is a sector bellwether with a sizeable planted nucleus oil palm estate of ~180,200 hectares in Indonesia. It remains one of the region’s most cost-effective producers with an estimated operating cost of USD268 per CPO tonne in 2018.
- With a weighted average age profile of 11 years, we expect First Resources to deliver 8% 2018-21 CAGR in FFB output. It net gearing of ~30% (as at 31 Dec 2018) is decent, allowing FR the option to growth via M&A.
Agricommodities valuation summary
See also
Singapore Research
Maybank Kim Eng Research
|
https://www.maybank-ke.com.sg/
2019-04-17
SGX Stock
Analyst Report
2.030
SAME
2.030
0.970
SAME
0.970
