FIRST RESOURCES LIMITED (SGX:EB5)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
JAPFA LTD. (SGX:UD2)
THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)
Consumer & Commodities Sector - NEUTRAL
Commodities Sector - Positive catalysts to look out for
- Stronger demand for palm oil due to its attractive pricing against other edible oils and early adoption of the 30% biofuel (B30) mandate by the Indonesian government from B20 currently.
- Rising/firm crude oil prices, which will be supportive for discretionary biodiesel usage.
- Friendly government policy to support or boost CPO price and weather risk in key palm oil and soybean regions that severely disrupt supply of palm oil or soybean oil.
- Slower new plantings, ageing estates and weaker fertilizer applications could lead to slower palm oil supply growth over the next few years.
Commodities Sector - Negative catalysts to fear
- Slower global growth due to concerns over US-China trade war, negative campaign and trade barriers against palm oil, which could adversely impact the demand for palm oil.
- Slower-than-expected drawdown of CPO stocks in Malaysia and Indonesia before the peak production season in 2H19F could lead to concerns of further build-up in stocks.
- Record global soybean stocks could weaken soybean and related prices and in turn drag down CPO prices.
- High import duties on palm oil in India could dampen the demand for palm oil.
Commodities Sector - Risk of earnings cuts in the next 2 quarters? YES
- Lower-than-expected CPO and PK prices due to weaker global growth. Average CPO price achieved in 4M19 was RM2,017 per tonne, below our average CPO price forecast of RM2,400 per tonne for 2019.
- Rising estates costs in the form of labour and fertilizer prices.
- Lower-than-expected downstream margin from changes in government policies.
Commodities Sector Stock preference: Wilmar and First Resources the most preferred
- We like WILMAR INTERNATIONAL LIMITED (SGX:F34) due to its attractive valuations (trading below P/BV) and catalysts in the form of its plans to list its China operations by 4Q19. We like FIRST RESOURCES LIMITED (SGX:EB5) for its young estates and relatively lower cost of production against peers.
- We have a REDUCE call on GOLDEN AGRI-RESOURCES LTD (SGX:E5H) due to its rich valuations and older estates profile.
- We have a NEUTRAL call on the sector as it is trading in line with 15-year historical average P/E but below historical average P/BV. While the sector may not look expensive, it lacks strong re-rating catalysts due to challenges facing the palm oil sector.
Consumer Sector - Positive catalysts to look out for
More supermarket store tender bids.
- In Apr, the Housing Development Board (HDB) mentioned there were four more scheduled supermarket open bids in 2019. There will also be several closed bids. Winning some of these bids would bode well for SHENG SIONG GROUP LTD (SGX:OV8) as it would then benefit from new store revenue growth, to make up for its recent sluggish SSSG. Sheng Siong Group will add three more stores by May, taking its store count to 57 (from 54) and store acreage up 15.8k sq ft to 511.9k sq ft (from 496k sq ft).
Successful market share gains and improved margins for SABECO.
- SABECO’s new management, which took over in Aug last year, had embarked on several initiatives to improve its market share and margins. In 1Q19, it managed to grow volumes by 14.8% y-o-y and revenue by 9.6% y-o-y, and take GP margins up sequentially to 23.5% (vs. 4Q18: 21%).
Continued y-o-y growth for Thaibev’s domestic alcohol volumes.
- 1HFY9/19 THAI BEVERAGE (SGX:Y92)’s spirits and beer volumes grew 7.8% and 5.8% y-o-y, respectively, reversing the downward trend seen in 1HFY9/18. According to the management, third-party data show that brown spirit volumes were still in growth mode in Apr 19, whilst white spirits typically see stronger growth trends in comparison.
Consumer Sector - Negative catalysts to fear
Weak supermarket sales index.
- The supermarket retail index was down 3.2% y-o-y in Mar, and has been down in the past 15 months. Sheng Siong Group’s 1Q19 y-o-y SSSG was -0.2%.
Slower Thaibev alcohol consumption.
- Domestic spirits saw a slight q-o-q sequential reduction in 1Q19 (despite 1HFY9/19 volumes growing 7.8% y-o-y). The risk is if this trend continues in the latter quarters, and reduces the yearly recovery seen thus far.
Lower y-o-y Indonesia broiler prices. Emergence of African Swine Fever (ASF) in Vietnam.
- Average Indonesian broiler prices up till Apr 19 were down 11% vs. average FY18 Indonesian broiler prices. JAPFA LTD. (SGX:UD2) saw PT Comfeed’s (Indonesian division) earnings fall y-o-y in 1Q19, due to losses in its broiler segment. According to the PigProgress website, Vietnam’s first case of African Swine Fever (ASF) was reported on 19 Feb 19. There has been no impact on Japfa’s earnings thus far, but any culling could result in impairment costs moving ahead.
Consumer Sector - Risk of earnings cuts in the next 2 quarters? YES
- Thai Beverage’s earnings risk is low because we have assumed conservative volume growth for its domestic alcohol volumes. Similarly for Sheng Siong Group, we have assumed flat y-o-y GP margin of 26.8% as a result of delayed distribution centre expansion.
- Dairy Farm earnings risk could come from its supermarket/hypermarket business if recovery does not take place.
- Japfa may be hit by culling costs from its Vietnam swine division with the African Swine Flu (ASF) having hit Vietnam in Mar 2019. Its poultry division may not recover post Lebaran season.
Consumer Sector Stock preference: Thai Beverage the most preferred, Japfa the least
- Our preferred stock within the consumer segment is Thai Beverage due to twin options of improvement in domestic Thai alcohol consumption and/or the improvement in SABECO’s operational straits. Moreover, Thai Beverage's share price has recently retraced, and is now trading at a CY20F P/E of 17.0x which is below -1 s.d of 5-year mean. See report: Thai Beverage - 2Q19/FY19F Still Swigging.
- Our least preferred stock is Japfa, due to the risks posed by both its Indonesian poultry and Vietnam swine divisions. See report: Japfa Ltd - 1Q19 Holding Out For ‘Lebaran’ Joy.
- We would watch to accumulate DAIRY FARM INTERNATIONAL (SGX:D01) below the US$8 level. See report: Dairy Farm Int'l - 4Q18 Biting The “SEA-food” Bullet.
- We are NEUTRAL on the sector as we believe most stocks within our coverage may trade range-bound given the limited near-term catalysts.
- Sheng Siong Group may need a longer gestation period for its new stores to hit optimal revenue. Dairy Farm International still has ongoing weakness within its food business. Japfa is affected by uncertainties across multiple segments.
See also
Cezzane SEE
CGS-CIMB Research
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Ivy NG Lee Fang CFA
CGS-CIMB Research
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https://research.itradecimb.com/
2019-05-21
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