Plantation Sector 2020 Outlook - RHB Invest 2019-12-19: Singapore Planters Still Inexpensive

Plantation Companies - RHB Invest  | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Plantation Sector 2020 Outlook - Singapore Planters Still Inexpensive

  • Maintain OVERWEIGHT, Top Picks: FIRST RESOURCES (SGX:EB5), BUMITAMA AGRI (SGX:P8Z) and WILMAR INTERNATIONAL (SGX:F34). The CPO price climbed to a high of MYR2,665/tonne in end-November. While we expected this increase, we believe the sudden spike may be a bit too sharp. We expect to see a slight pullback before prices start picking up again in 1Q20.
  • Our CPO price assumption is MYR2,400/tonne for 2020, and we expect the commodity to trade between MYR2,200-2,800/tonne in 2020, with 1H20 prices being stronger than 2H20.



3 factors that will buoy prices in 2020

  • We detail the three factors that will buoy prices in 2020.

A CPO deficit is imminent in 2020

  • A CPO deficit is imminent in 2020, as demand growth outstrips supply growth. CPO stocks are on the way down, as production growth should slow in 2020, due to the impact of dry weather this year and fertiliser application reduction by smallholders in 2019.
  • On a global scale, stock/usage ratios for CPO, soybean oil, the eight vegetable oils as well as the 17 oils and fats complex should decline to below averages for the first time in 8-9 years.

Biodiesel: the largest demand catalyst.

  • The B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020. Although the price gap between CPO and gasoil (POGO) is now in negative territory at -USD15.2/barrel, we believe Indonesia’s mandate remains achievable due to the availability of USD2bn in the biodiesel fund. Based on current CPO prices, this fund should be able to subsidise 10m tonnes of biodiesel, which makes up 125% of 2020’s mandate. This is notwithstanding the likely resumption of export duty collection come Jan 2020, as CPO prices have already crossed the threshold of USD570/tonne.
  • Indonesia’s mandate is to produce 9.6m kilolitres (8m tonnes) of biodiesel for domestic usage in 2020 (+45% y-o-y) vs. 6.6m kilolitres (5.5m tonnes) in 2019 (+69% y-o-y). We believe implementation will be successful, due to the availability of subsidies in the Biodiesel Fund and also to the fine of IDR6,000/litre for non-compliance.
  • While there are fears that discretionary blending using palm oil may disappear due to the current negative POGO gap, we expect this amount to be minimal. The EU and China are the main markets consuming palm-based biodiesel now, with about 4m tonnes going to the EU and 1.3m tonnes to China. EU’s demand is likely to be flat until 2023, after which it should start winding down demand until 2030, when the palm-based biodiesel ban takes effect. China’s demand of about 1.3m tonnes is mandated, but not subsidised – and this is the discretionary demand that may disappear.
  • Nevertheless, Indonesia’s and Malaysia’s mandated demand increase of 3-4m tonnes will more than offset any discretionary demand disappearance.

Food demand should remain strong.

  • China’s CPO imports have been very strong – up 43% y-o-y in YTD-October, while edible oil imports rose 53%. This should continue as long as the African swine flu is still prevalent. In addition, as it takes 1-2 years to fully replenish hog inventory post-swine flu, we believe demand will remain robust from China as we move into 2020. This, in addition to the impact of the still-ongoing trade war making US soybeans more expensive, will keep demand relatively steady from China.
  • China’s imports are expected to rise 8% in 2020. Demand should remain stable from India, despite the noise over the restriction of palm oil imports.
  • We expect India to continue to import CPO at a steady pace, due to growing consumption per capita and population. India's edible oil imports were up 2.7% YTD-September while CPO imports rose by 9.2% y-o-y. In 2020, the Indian imports to increase by 6% in 2020.






Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-12-19
SGX Stock Analyst Report BUY MAINTAIN BUY 4.750 SAME 4.750
BUY MAINTAIN BUY 1.950 SAME 1.950
BUY MAINTAIN BUY 0.800 SAME 0.800



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