Regional Plantations - Maybank Kim Eng 2020-03-11: Value Re-emerging In Small/Mid Caps

Regional Plantations - Maybank Kim Eng Research | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - Value Re-emerging In Small/Mid Caps

Stockpile at 32-month low

  • MPOB’s Feb 2020 stockpile of 1.68mt (-4% m-o-m, -45% y-o-y) is the lowest since June 2017. Fundamentally, the tight stockpile should support higher CPO price but concern over COVID-19 and low crude oil may keep CPO price upside in check for now. Our 12M NEUTRAL view on the sector is unchanged as valuation of large caps already reflected CPO ASP of MYR2,300/t, our estimate for 2020.
  • Nonetheless, value can be found in the SMID caps which trade at or near GFC trough PBVs.
  • While maintaining our EPS and TPs, we tactically upgrade Kuala Lumpur Kepong, Sarawak Oil Palms, Ta Ann, THP and Boustead Plantations to BUY (from HOLD) given upside after recent selldown. Our other BUYs are First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), & TSH Resources. SELL Genting Plantations for its lofty valuation.

Fifth consecutive month of stockpile decline

  • MPOB’s Feb 2020 stockpile declined for the fifth consecutive month to 1.68mt, slightly below market estimates of 1.76mt. The drawdown in stockpile was despite higher sequential output of 1.29mt (+10% m-o-m, - 17% y-o-y) as combined higher domestic disappearance of 0.35mt (+16% m-o-m, flat y-o-y) and decent exports of 1.08mt (-11% m-o-m, -18% y-o-y) exceeded absolute output.
  • Nonetheless, the relatively stronger output was a surprise to us as the month of February had two fewer days than January although it can be argued that January had a long CNY weekend break. Still February output was 17% below that of last year.
  • February’s exports were down m-o-m to most major destinations except Philippines (+9% m-o-m, +58% y-o-y), Turkey (+56% m-o-m, +178% y-o-y), USA (+11% m-o-m, +29% y-o-y), Vietnam (+10% m-o-m, -30% y-o-y) and Others (+8% m-o-m, +28% y-o-y).

CPO price volatility likely disrupted ST demand

  • The preliminary Malaysian export estimates for shipments in the first 10 days of March by Amspec and Intertek (independent cargo surveyors) indicate a 3.5%/2.4% m-o-m decline to 351,874t / 335,155t respectively. While we doubt this will be representative of the demand trend for the month of March, we believe the volatility and sharp decline in CPO price in recent weeks have somewhat affected demand in the short term. Once CPO price stabilizes, it will be more conducive for business.

CPO price is low given present tightness

  • We expect CPO price to gradually strengthen once rational sentiment returns as palm oil stockpile remains tight and may stay tight for the rest of 1H20 (ie below 2.0mt) on still weak output expectations.
  • Following recent correction, CPO price has regained some price competitiveness as it has now widened its discount against US soyoil (USD62/t on 9 Mar), Argentina soyoil (USD134/t) and Rapeseed oil (USD371/t). However, discretionary demand for palm biodiesel will remain elusive as palm oil has been trading at a premium to gasoil since Nov 2019.
  • Biodiesel demand will solely be reliant on government mandated blend. We are keeping our 2020-21 CPO ASP forecasts of MYR2,300/t and MYR2,400/t.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-11
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850