Regional Plantations - DBS Research 2019-09-11: Sideways At The Moment

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

Regional Plantations - Sideways At The Moment

Stockpile keeps trending down but CPO price is moving sideways.
Soybean price remains the key ceiling level for CPO price.
Soft output to prevent oversupply in 4Q19.
WILMAR INTERNATIONAL (SGX:F34), FIRST RESOURCES LIMITED (SGX:EB5), BUMITAMA AGRI LTD. (SGX:P8Z) and FGV Holdings are top BUYs in this universe.

Malaysia’s palm oil stockpile dropped to 2.25m MT (-11% y-o-y, -6% m-o-m) – this is an encouraging sign that the oversupply is slowly dissipating. August export performance helped the inventory drawdown and we believe it was driven attractiveness of palm oil price against other more expensive edible oils.

Exports jumped 16% m-o-m to 1.73m MT (+7% y-o-y) in August and quite interestingly, export to China tripled m-o-m to 300k MT. But, we see it is quite challenging for export to climb up further. We understand the palm oil is well positioned to fulfill any potential edible oil shortage in China, in the event that the pro longed African swine flu and trade spat with US disrupt soy crushing activities further.
However, we see that the market is not ready to buy CPO at a higher price than soybean oil (SBO) and hence at the moment, SBO sets the key ceiling level for CPO price. CPO price peaked at US$527 per MT last month following the stellar export trend, before correcting to normalise the spread at above US$100 per MT against soybean oil on the first week of September.

August palm oil output of 1.82m MT (-2% y-o-y, +5% m-o-m) indicates that the seasonal high output this year is modest, partially due to last year’s high base. We expect the monthly output to not exceed 1.9m MT for the rest of the year, and this will also serve to prevent palm oil price from dropping below US$500 per MT for the rest of 2019.

Stockpile downtrend should prevent CPO price from dropping below US$500 per MT and hence, on track to meet our 2019 CPO price forecast (US$500 per MT). Our picks are planters which better at capitalising the higher palm oil price q-o-q in their 3Q19 earnings performance, which are First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), and FGV Holdings.
Meanwhile, we also like Wilmar International (SGX:F34) as its China operation valuation is riced in.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | Jin Wu LOW DBS Research | https://www.dbsvickers.com/ 2019-09-11

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