Plantation Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Earnings Rebound On The Horizon

Plantation Sector 2020 Outlook & Strategy - DBS Research | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z) WILMAR INTERNATIONAL LIMITED (SGX:F34) INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)

Plantation Sector 2020 Outlook & Strategy - Earnings Rebound On The Horizon




Outlook


Earnings recovery in 2020.

  • Plantation companies’ earnings are expected to rebound in 2020 on higher crude palm oil (CPO) prices and stable yields. We are expecting earnings recovery for upstream CPO planters in 2020. This would come from a low base in 2019 and mainly driven by higher average selling price (ASP).
  • Furthermore, we are expecting 13% y-o-y earnings growth for Wilmar International accounting for the recovery of its oilseed crushing segment in the first nine months of 2019.

CPO prices to sustain recovery in 2020.

  • The worst is probably over for CPO prices. We are expecting average annual CPO price to rebound by 19% to US$596 per MT in 2020 on tightening outlook for supply and demand. Palm oil production slowed down in 2H19 and this is likely to persist in 2020.
  • With reasonable headroom for soybean prices due to positive developments in the US-China trade war and African Swine Fever (ASF), we expect more headroom for palm oil to perform.

Demand to remain sound on CPO affordability.

  • Demand for palm oil demand has been steady. This scenario will likely sustain into 2020 driven by India and China. Palm oil remains the cheapest edible oil in the world. This will continue to attract food and fuel based demand around the world. Fully weaning countries away from palm oil will be challenging.
  • India palm oil imports remain solid despite a 44% import tax; the European Union (EU) is likely to resume imports before 2030 the Renewable Energy Directive II (RED II) initiative kicks in.

Indonesia’s B30 limits downside risks.

  • Indonesia’s biodiesel B30 programme will protect plantations from downside risks. B30 may potentially absorb at least 6m MT of palm oil or 10% of global supply and demand. If necessary, Indonesia could ramp up biofuel absorption next year to 8m MT given the availability of refining capacity and subsidies from the CPO fund.


Risks


Weather factors.

  • Weather is the key short-term risk to our forecasts. The weather will impact soybean planting and harvesting in the US and South America, and may also affect productivity of oil palm trees. For our CPO price forecast, we take into account the lagging effects of dry weather in 2019 which may affect tree productivity in 2020.
  • A worse-than-expected productivity trend next year would be an upside risk to CPO prices.

Trade war development.

  • The US-China trade war has sparked fears over China’s soybean imports and affected market sentiment on soybean prices. Unless China imports soybeans from elsewhere, this sentiment could affect US soybean futures contracts and global soybean spot prices. Low soybean prices would also pressure CPO prices.

Indonesia’s biodiesel programme.

  • Delivery of Indonesia’s B30 programme is an upside risk to our CPO price forecast. We are assuming only 6.2m MT of palm oil absorption in 2020. A full implementation of the programme will absorb 8m MT. CPO prices could breach US$600 per MT in 2020, assuming all other factors remain constant.


Valuation & Stock Picks


Below +1 SD of five-year PE multiple.

  • Before the recent share price recovery, Singapore’s listed plantation companies’ valuation de-rated from +1SD (standard deviation) of its 5-year price-to-earnings (PE) multiple in 2016, close to its 10-year mean due to weak CPO prices in 2016-2019. Dividend yields should support share prices, with First Resources yielding close to c.2% and Wilmar International yielding close to c.4% ex. special dividend.
  • We expect earnings recovery to drive plantation companies share price. Furthermore, the initial public offering (IPO) of Wilmar International’s China operations Yihai Kerry Arawana Holdings (YKA) and special dividend could offer further catalysts for its share price in 2020.

First Resources for CPO play; Wilmar International for YKA listing and special dividend.






William Simadiputra DBS Group Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.10 SAME 2.10
BUY MAINTAIN BUY 0.810 SAME 0.810
BUY MAINTAIN BUY 4.600 SAME 4.600
HOLD MAINTAIN HOLD 0.290 SAME 0.290



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