Agricommodities Sector Outlook - Maybank Kim Eng 2019-04-17: An Opportunity To Trade In 2Q19

Agricommodities Sector - Maybank Kim Eng Research | SGinvestors.io 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:
    1. weather anomalies resulting in poorer-than-expected output growth;
    2. lower-than-expected CPO price achieved;
    3. negative policies imposed by import countries;
    4. unfriendly government policies in producing countries;
    5. sharply lower crude oil prices which makes palm biodiesel demand not viable; and
    6. 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 BUY MAINTAIN BUY 2.030 SAME 2.030