Plantation – Singapore - UOB Kay Hian 2019-04-17: Catching Up On Valuation

WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Plantation – Singapore - Catching Up On Valuation

Interest in the palm oil sector has improved with the recovery in prices and potentially lower production with the mild El Nino and lack of fertiliser applications in 2018. Finally, Singapore-listed companies are catching up after two years of underperformance vs regional peers.
Interest in GOLDEN AGRI-RESOURCES LTD (SGX:E5H), FIRST RESOURCES LIMITED (SGX:EB5) and BUMITAMA AGRI LTD. (SGX:P8Z) will be driven largely by a more positive view on CPO prices. WILMAR INTERNATIONAL LIMITED (SGX:F34) has outperformed as it is getting closer to the listing of its China operations.

Singapore-listed plantation companies’ share prices have outperformed regional peers ytd after dropping in 2017-18. We believe share prices have bottomed and we reckon that there might be more upside, given:
1. Undemanding valuations. Singapore-listed plantation companies are trading at lower PE multiples than Malaysia peers. However, most of the Singapore companies will have better earnings and higher production growth in the coming years.
2. Higher production growth. Production growth of Singapore companies came in higher in 2018 despite slightly lower earnings contraction than regional peers amid sluggish CPO prices in 2018 (except for Golden Agri-Resources). All the estates of Singapore-listed plantation companies are in Indonesia and these estates have younger age profiles than that of Malaysia peers, contributing to higher production growth.
3. More resilient earnings than pure Malaysian players. Despite lower CPO prices, the average net profit y-o-y contraction in 2018 for Singapore listed plantation companies was only 17% vs Malaysia peers’ average of -47% y-o-y. This was attributed to the younger age profile and contributions from young mature areas which led to higher production growth. This trend is likely to continue into 2019-20 and will enable Indonesia plantation companies to report better earnings growth.

We reckon the recent buying interest on Wilmar is driven largely by the potential re-rating from its China IPO. Although this is not new, investors’ confidence in the listing has increased as the IPO timeline gets closer (management is guiding the listing in 4Q19) and Shanghai A-shares are holding up.
We believe there is still upside to Wilmar’s share price despite the 16% ytd rise as current share price is only factoring in 17x PE for its China operation. Our fair value of S$3.90 factors in 20x PE for its China operation. Assuming 23x and 25x PE, our fair value would be at S$4.10 and S$4.25 respectively.

We maintain our view that CPO prices in 2019 will be stronger on the back of:
1. lower production,
2. strong demand for biodiesel,
3. lower soybean crushing, and
4. lower rapeseed and canola production.
Our CPO price assumption for 2019 is RM2,350/tonne.

The National Oceanic and Atmospheric Administration (NOAA) recently announced a weak El Nino. The weather has been relatively dry from Dec 18 to Mar 19, and this is likely to have an impact on palm oil production starting 2H19.

2019 should see higher biodiesel usage, supported by:
1. the expanded biodiesel mandate in Indonesia; and
2. Malaysia increasing biodiesel blending from 7% (B7) to 10% (B10) for the transport sector and introducing 7% biodiesel blending (B7) for industrial use.

The Indonesian government may increase the biodiesel mandate of B20 to B30 in late-19 or early-20. The Malaysian government is also looking to increase the biodiesel mandate from B10 to B20 for the transportation sector, and B7 to B10 for the industrial sector by 2020.

No change to our CPO price assumptions of RM2,350/tonne for 2019 and RM2,400/tonne for 2020.
We see higher CPO prices in 2H19 as inventories are drawn down on lower production growth expected for 2H19 while demand is supported by high crude oil prices and wide price discount to soybean oil prices.

Higher-than-expected CPO production.
Weakening crude oil prices. Biofuel demand is close to 30% of global palm oil consumption. Thus, weakening crude oil prices could put this demand at risk.
Changes in government policies, especially from importing countries. Key markets to monitor would be Europe (on biofuel policy), India (import duty and base prices) and Indonesia (biodiesel mandate).

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-17

SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900

BUY MAINTAIN BUY 0.810 SAME 0.810

HOLD MAINTAIN HOLD 1.850 SAME 1.850

SELL MAINTAIN SELL 0.210 SAME 0.210