Soft Commodities - OCBC Investment 2019-04-09: CPO Recovery

Soft Commodities - OCBC Investment Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Soft Commodities - CPO Recovery

  • More interest in sector.
  • Monitor the politics.
  • Prices to close the year higher.

Interest returning to CPO sector

  • After a 35% fall from early 2017 to end 2018, crude palm oil prices (KO1 Comdty) are up about 6% this year.
  • Crude palm oil stocks (CPO) have also seen more interest and better price performance in the past few trading sessions – month to date, Golden-Agri Resources share price is up 12.5%, First Resources share price is up 9.3%, while Wilmar share price (has palm oil exposure as well) is up 5.4%.

Possible drivers behind recent CPO price rise

  • On 27 Mar, Reuters reported that a senior Indonesia minister had warned that the country could consider exiting the Paris climate deal if the European Union goes ahead with its plan to phase out palm oil in renewable transportation fuel.
  • As highlighted in our earlier sector report “Soft Commodities: Greater forces at play” on 20 Feb, the EU Commission in Feb submitted a delegated act that classified palm oil from large plantations as unsustainable and proposed that the commodity be excluded from the bloc’s biofuels target. Uncertainties on future demand from the EU have weighed on CPO prices and related stocks.
  • Following the comments by the Indonesian minister and coupled with a likely decline in Malaysian CPO inventories in Mar (El Nino hurting production), CPO prices have risen steadily by ~5.6% month-to-date.

Expecting prices to close the year higher

  • Looking ahead, OCBC Treasury Research and Strategy are forecasting crude palm oil to average RM2,300/MT in 3Q19 and RM2,400/MT in 4Q19. This would mean a ~13% upside from current levels to 4Q19, and are likely to support CPO related stocks as well.
  • However do note that CPO prices are historically volatile and subjected to factors such as weather (which impacts supply), politics (EU and Indonesia, Malaysia), regulatory policies (e.g. Indonesia’s and Malaysia’s mandatory use of diesel containing locally produced biofuel), amongst others.

Comparing valuations

  • At current prices, the forecasted dividend yield for Golden Agri-Resources is about 1.8% while Wilmar’s is 3.0%.
  • Though GOLDEN AGRI-RESOURCES LTD (SGX:E5H) [Rating: HOLD, Fair Value: S$0.29] which is more exposed to the CPO sector may move more in tandem with CPO prices, we note that its stock is currently trading at 0.72x forward P/B, close to the +1 s.d level over the past five years. See report: Golden Agri-Resources - Good Proxy To CPO.
  • In comparison, WILMAR INTERNATIONAL LIMITED (SGX:F34) [Rating: HOLD, Fair Value: S$3.44] is trading at 0.93x P/B, close to its five-year historical mean (refer to exhibits). Though the company may see an impact in earnings due to weak soybean crush margins in 1Q19, a proposed spin-off of its China business operations by the end of the year would unlock value and inject more transparency to valuations. See report: Wilmar - Waiting For 1Q19 Results.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-09
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.440 SAME 3.440