SINGAPORE (Dec 10): The storm looks to have blown over for palm oil players.
According to DBS Group Research, average crude palm oil (CPO) prices are expected to rebound by 19% to US$596 per MT in 2020.
The recovery will be driven by plateauing global palm oil supply, DBS says, alongside reasonable headroom for soybean price due to positive developments in the US-China trade war and African swine fever (ASF).
In addition, the brokerage also expects demand to remain steady in 2020.
“After weak share prices in 9M19, CPO stocks rebounded in 4Q19 due to the recovery of CPO price and this led to stronger y-o-y earnings on higher average selling price (ASP),” says lead analyst William Simadiputra in a Dec 9 report.
But even as the plantation counters look poised to leave the dry spell behind them, DBS believes it is important to stay selective on stock picks.
“The plantation universe is currently a mixed bag,” Simadiputra says. “Some companies are better than others in capitalising on the CPO price recovery.”
Despite the hype over the CPO price rally, Simadiputra stresses that it is good to be selective. “Some companies have rallied ahead of their fundamentals,” he says. “We prefer Singapore-listed Bumitama Agri (BAL), First Resources (FR) and Wilmar International (WIL) over Indonesia-listed stocks.”
For one, Simadiputra favours BAL and FR for their undemanding valuations as well as strong yield performance to capitalise on the recovery of CPO prices.
DBS has “buy” recommendations on BAL and FR with higher target prices of 81 cents and $2.10, respectively. The target prices were raised from 72 cents and $1.95 previously.
Simadiputra is raising his earnings forecasts for BAL in FY2020F and FY2021F by 12% and 13% respectively, to account for better profitability from higher palm oil prices in the year, and more conservative fertiliser application next year.
At the same time, he expects FR’s earnings to rebound by 72% y-o-y to US$148 million ($201 million) in 2020, driven by higher CPO prices.
“FR remains our [top] pick in the plantation sector given its strong asset base to capitalise on the edible oil market recovery in 2020,” Simadiputra says.
Meanwhile, the analyst also likes WIL for its integrated upstream-downstream business model, which provides a cushion on profitability during volatile commodity prices. “We assume that WIL can maintain good profitability amid low edible oil prices, despite the prolonged trade war," Simadiputra says.
“As we gather more information on Wilmar’s China operations, we are increasingly convinced that Wilmar’s potential is far greater than market expectations,” he adds. “A special dividend and 1Q20 listing of its China business Yihai Kerry Arawana Holdings (YKA) are further positive catalysts for share price.”
DBS is keeping its “buy” call on WIL with a higher target price of $4.60, from $4.35 previously.
“Our upbeat long-term view on CPO prices also supports these planters’ earnings and free cash flow outlook, supporting our target prices,” Simadiputra says.
“This prompts us to reiterate our stock-picking strategy,” he adds. “We only choose companies with potential for yield expansion and volume growth, as well as those that are able to keep their costs low for significant earnings growth leverage.”
As at 3.17pm, shares in Bumitama Agri are trading 2.8% higher at 74.5 cents, shares in First Resources are trading 1.1% up at $1.85, and shares in Wilmar are trading 1.7% higher at $4.17.