CFA Society Singapore
SINGAPORE (Apr 9): OCBC Investment Research continues to rate the soft commodities sector “neutral” despite the renewal of interest in the sector and higher forecast of the year’s price to close.
So far, crude palm oil price have increased by about 6% this year, after a 35% plunge from early 2017 to end 2018. Crude palm oil (CPO) stocks have also gathered more interest and better price performance in the past few trading sessions.
Month to date, Golden-Agri Resources is up 12.5%, First Resources is up 9.3%, while Wilmar, which has palm oil exposure as well, is up 5.4%.
Meanwhile, Reuters on Mar 27 reported that a senior Indonesian minister warned that the country could consider exiting the Paris climate deal if the European Union goes ahead with its plan to phase out palm oil in renewable transportation fuel.
In a Tuesday report, analyst Low Pei Han says, “Uncertainties on future demand from the EU have weighed on CPO prices and related stocks. Following the comments by the Indonesian minister and coupled with a likely decline in Malaysian CPO inventories in March (El Nino hurting production), CPO prices have risen steadily by about 5.6% month-to-date.”
Looking ahead, OCBC expects CPO to average RM2,300/MT in 3Q19 and RM2,400/MT in 4Q19, representing about 13% upside from current levels to 4Q19, and are likely to support CPO-related stocks as well.
“However do note that CPO prices are historically volatile and subjected to factors such as weather which impacts supply, politics (EU and Indonesia, Malaysia), regulatory policies (e.g. Indonesia’s and Malaysia’s mandatory use of diesel containing locally produced biofuel), amongst others,” notes Low.
The related stocks under the research house’s coverage are Golden-Agri and Wilmar, which both have “hold” recommendations wit fair values of 29 cents and $3.44, respectively.
Despite the fact that Golden-Agri is more exposed to the CPO sector and may move more in tandem with CPO prices, the analyst notes that the stock is currently trading at 0.72 times forward price-to-book, close to the 1 SD level over the past five years. The stock has a forecasted dividend yield of about 1.8%.
In comparison, Wilmar is trading at 0.93 times price-to-book, close to its five-year historical mean. Although the group may see earnings impacted by weak soybean crush margin in 1Q19, its proposed spin-off of its China business operations by end-2019 could unlock value and inject more transparency to valuations.
As at 12.50pm, shares in Golden-Agri and Wilmar are trading at 32 cents and $3.48, respectively.