SINGAPORE (March 31): RHB is upgrading Bumitama Agri to “buy” from “neutral” despite falling CPO prices ahead on strong double-digit FFB output growth over the next few years plus attractive valuations at current levels.

In a Friday report, RHB believes CPO prices are on a downtrend given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April.

As the market is forward looking, RHB advises investors to lock in profits. The price gap between CPO spot and futures prices widened to MYR200/tonne ($63/tonne) while the price gap between CPO and soybean oil prices widened back to around USD60/tonne ($84/tonne) currently. While the price premium between soybean oil and CPO is still far from historical averages of US$100-150/tonne, RHB believes there is still room for the premium to widen.

In addition, RHB says demand is not likely to recover in 2017, with the global economy still struggling to grow and domestic consumption still at sluggish levels. Therefore, despite the fact that inventories of CPO at the importing countries of India and China are at low levels currently, the house does not expect restocking to occur in a significant manner in the coming months.

Given the height CPO prices had achieved in the first two months of this year, RHB is raising its CPO price forecast for 2017 to MYR2,600/tonne ($821/tonne). However, it is lowering its price assumption for FY18 to MYR2,400 to account for its expectation that prices would continue to be weak.

“We raise our target price slightly to 89 cents, based on 13x 2017 P/E , which implies an EV/ha of US$9,000/ha, below its peers of US$10,000-15,000/ha,” says RHB.

Shares of Bumitama are trading flat at 80 cents.