Regional Plantations - DBS Research 2020-08-10: A Good Start To 2H20

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BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) INDOFOOD AGRI RESOURCES LTD. (SGX:5JS) WILMAR INTERNATIONAL LIMITED (SGX:F34)

Regional Plantations - A Good Start To 2H20

• Inventory dropped m-o-m to 1.7m MT in July 2020.
• Exports to India doubled m-o-m.
• Market awaits 2Q20 results amid CPO price uptrend.
• London Sumatra (LSIP), First Resources (SGX:EB5), Wilmar (SGX:F34) and KL Kepong (KLK) are our picks.

July 2020 CPO stockpile slid to 1.7m MT.

• Malaysia’s crude palm oil (CPO) stockpile slid to 1.7m MT (-29% y-o-y, -11% m-o-m) in July 2020, trumping our expectations, as output slid 4% m-o-m to 1.8m MT (+4% y-o-y).
• Meanwhile, exports continued its uptrend in July, rising to 1.78m MT (+20% y-o-y, +4.2% m-o-m). The stockpile level represents a good start to 2H20, providing a strong cushion against any unexpected strong output or weaker-than-expected demand in 2H20.
• We maintain our FY20 CPO price forecast of US$596 per MT (RM2,450 per MT) for now.

Exports to India almost doubled m-o-m.

• The strong exports were driven by India whose CPO volume almost doubled m-o-m to 455.2k MT (flat y-o-y, +85% m-o-m) and the EU’s CPO purchase of 170k MT (+18% y-o-y, +34% m-o-m) in July 2020.
• Meanwhile, exports to China weakened by 18% m-o-m to 288.6k MT, albeit doubling on a y-o-y basis.

Stage is set for stronger prices.

• CPO prices surged to US$680 per MT, bringing the YTD average to US$590 per MT in 2020. We think that the recent CPO price rally has legs amid tight output across Indonesia and Malaysia. Some Indonesia-listed planters are facing keen competition over external fruit purchases due to limited supply post-Hari Raya holidays.
• Also, AALI said last week that the tight supply is likely to persist until the onset of the rainy season in December 2020. However, the further upside for CPO prices could be capped by the narrowing discount to soybean oil price, and the absence of a crude oil price rally.

Market awaits 2Q20 results, even as CPO price breaches US$600 per MT.

• Weaker q-o-q earnings arising from CPO price fluctuations and tepid output will set the tone for CPO planters’ performance in 2QCY20, while we expect Wilmar (SGX:F34)’s earnings to trail the performance of its subsidiary Yihai Kerry Arawana (YKA).
• We believe investors have yet to bake in a CPO price recovery to above US$600 per MT, as Indonesia’s biodiesel programme is depending on CPO Fund availability in 2H20, meanwhile importing countries such as India and China could still be focusing on curbing COVID-19.
• Our picks are London Sumatra (LSIP), First Resources (SGX:EB5), Wilmar (SGX:F34) and KL Kepong (KLK).

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | Malaysia Research Team DBS Research | https://www.dbsvickers.com/ 2020-08-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.660 SAME 0.660

BUY MAINTAIN BUY 1.700 SAME 1.700

HOLD MAINTAIN HOLD 0.290 SAME 0.290

BUY MAINTAIN BUY 4.60 SAME 4.60