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

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Agricommodities Sector Outlook - An Opportunity To Trade In 2Q19

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.

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.

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 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.