India has raised its effective import duties on crude palm oil (CPO) effective Feb 2 in a negative for the palm oil industry. Though CGS-CIMB’s Ivy Ng and Nagulan Ravi have thus issued a “neutral” call due to the potential backlash on upstream planters, Indonesian firms with exposure to downstream refining like First Resources and Wilmar International could see slight positive.
“On an overall basis, we estimate the revision will result in the effective import duty for CPO rising to 35.75% from 30.25%. However, there is no change to the effective import duty for crude soybean oil and crude sunflower oil which remains at 38.5%,” they write in a Feb 2 broker’s report. This implies an additional US$57.70/tonne tax on CPO imports, which is likely to be passed onto consumers in India.
Now this new measure could dampen demand for palm oil in India by raising the price of cooking oil. Ng and Ravi see this as a near-term negative for CPO prices as India was the largest palm oil importer in 2019, accounting for 19% of total imports. Yet, by increasing the costs of refining palm oil in India, refiners in Indonesia could become more competitive, considering the new export levies imposed on CPO in Indonesia.
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This therefore strengthens the investment thesis of plantation blue chip Wilmar International, a downstream palm oil player. Already benefiting from wider differentials between export levy rates between processed palm oil and CPO, the new import duties into India could see greater demand for its downstream business.
“We like Wilmar International for its attractive valuations and growth potential in China post listing of Yihai Kerry Arawana (YKA). Key catalysts are better-than-expected earnings due to strong CPO prices and crushing activities, a potential special dividend payout and rising interest in Wilmar as a cheaper and more liquid entry into YKA,” say Ng and Ravi.
For investors seeking a less expensive alternative in terms of absolute price, First Resources is another compelling play to consider. An integrated palm oil player, there is hope that the additional income from its downstream operations could offset the pressure on its upstream business.
The CGS-CIMB analysts like First Resource’s strong growth output prospects given its young estates. William Simadiputra of DBS Research notes that given their prime age of 13 years, First Resource’s estates are now on a high yield productivity cycle, leading to greater profitability and ROE performance than its peers.
“We believe that [First Resources’] share price should move up as FR has consistently achieved above average CPO yield and profitability, leading to double digit return on equity (ROE),” Simadiputra remarks in a Feb 2 broker’s report. He sees the stock as the best proxy for investors to ride the structural CPO price recovery trend.
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The DBS plantations analyst predicts a strong finish to 2020, with earnings potentially jumping 32.6% off 2019’s low base despite the Covid-19 pandemic in 1H2020. 4Q2020 earnings are seen to come in at US$38 million due to firm 4Q2020 palm oil prices.
Valuation-wise, Ng, Ravi and Simadiputra all agree that First Resources is currently available at a bargain. With a predicted P/E ratio of 14.1 for FY2020 and 13.8 for FY2021, the counter is currently trading below its 5-year average PE multiple of 16.7 times. Prices are likely to re-rate on positive earnings momentum, says Simadiputra.
As of 10:52 am, Wilmar International is up 0.75% at $5.39 . First Resources is trading 0.64% up at $1.58.
