Regional Plantation Companies - DBS Research 2020-05-12: At A Crossroad?

FIRST RESOURCES LIMITED (SGX:EB5) WILMAR INTERNATIONAL LIMITED (SGX:F34)

Regional Plantation Companies - At A Crossroad?

Stockpile climbed to 2m MT – prices at a crossroad?
April 2020 production was stronger than expected.
Manageable stockpile level will prevent any further CPO price downtrend.
Integrated names like Wilmar (SGX:F34) likely to benefit from current volatility.

Malaysia’s April 2020 stockpile rose 18.3% m-o-m to 2.0m MT (-25% y-o-y), due to stronger-than-expected output of 1.6m MT (flat y-o-y, +18% m-o-m). The 4.7% m-o-m rise in exports to 1.23m MT (-25% y-o-y) was unable to keep stockpile stable m-o-m.

Though rising 60% m-o-m to 17k MT (-97% y-o-y), exports to India remained weak. Nonetheless, we believe exports to India will rebound sooner or later, with short-term demand being hit by COVID-19 lockdowns, as India is unable to produce enough vegetable oil domestically to meet local demand. Meanwhile, exports to China and the EU expanded 35% m-o-m and 7% m-o-m to 199.4k MT (-1% y-o-y) and 209.8k MT (+52% y-o-y) respectively.

As CPO prices are now testing the lower limits, our average price assumption of RM2,450 (US$596 per MT) might not hold if CPO prices fail to rebound. CPO price drivers include Indonesia’s B30 biodiesel programme being on track at least until year end, and steady EU and China demand that had surprisingly improved of late.
Meanwhile, we believe the Covid-19 situation won’t trigger any panic CPO sell-down, this occurred back in 4Q18 when production was also strong and the industry is now more prepared. Also, Indonesia and Malaysia’s stockpiles are relatively low at the moment. But India’s imports need to rebound quicker to cope with stronger-than-expected output risk in couple months ahead.

We believe the current situation of soft commodity prices is likely to benefit Wilmar (SGX:F34). Besides opportunity to enjoying favourable input costs, the outlook for its margins in 2020 is also bright, thanks to its end-to-end presence in key markets like China and India.
For plantation companies, we like LSIP, First Resources (SGX:EB5), FGV mainly for their undemanding valuations, as the market has priced in the lower CPO price scenario of US$450-470 per MT at their current prices.

William Simadiputra DBS Group Research | Jin Wu LOW DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.990 SAME 1.990

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