SINGAPORE (Sept 26): There is a 50-55% chance of an El Nino onset of fall this year from Sept to Nov with the probability increasing to 65-70% during winter 2018-19, say weather forecasters.
Should weather conditions turn severe, this could have a negative impact on total palm oil production subsequently and a decrease in overall supply would increase prices, if demand stays the same.
However, to date crude palm oil prices have failed to rally despite the impending El Nino weather conditions. According to a Wednesday report by OCBC Investment Research, the prognosis over palm oil demand to date remains soft; the recent contraction in palm oil demand in both EU and India are likely to persist for the rest of this year.
In India’s case, an uptick in import tax has increased the cost of imported palm oil to buyers. Recall that India -- in the earlier part of this year -- raised import duties on crude palm oil from 30% to 44%. Elsewhere in the EU, there is a shift away from non-sustainable palm oil sources with the European Sustainable Palm Oil project which aims to achieve 100% imports from sustainable palm oil sources by 2020.
For Golden-Agri, although production is expected to increase for the rest of this year, palm oil prices remain weak. Over the longer term, we would also monitor the group’s replanting programme with its ageing plantations.
Another reason that could have contributed to the share price weakness so far is likely the depreciation of the Indonesian rupiah, which OCBC also highlighted in its earlier reports.
The group had sustained foreign exchange loss of US$22.2 million ($30 million) in 2Q18 with the depreciation of the IDR against the USD.
“Meanwhile, with weak CPO prices, we lower our P/E from 17.5x to 16x FY19F earnings and as such our fair value drops from 26 cents to 24 cents,” says analyst Low Pei Han.
Year to date, units of Golden Agri are down 37% at 24 cents.
