Palm oil price has room to recover after dipping in 3QFY2022, says DBS Group Research analyst William Simadiputra.
This is due to its affordability versus other edible oils, as well as China’s low soybean crushing volumes that prevent soybean oil oversupplies.
In his Jan 11 report, Simadiputra says the limited room for output expansion will prevent major price reversal. Amid the demand recovery trend, the analyst believes that palm oil supplies have little room to grow and aid peaking crops yield performance due to a lesser number of young trees among the Indonesian and Malaysian estates.
“Particularly in Indonesia, palm oil yield seems difficult to expand further amid limited replanting and new planting programs,” he adds.
That said, RHB Group Research analysts Hoe Lee Leng and Syahril Hanafiah have maintained a “neutral” rating on the plantation sector, expecting Indonesia’s policies to continue playing a big part in 2023’s price direction.
The analysts note that from the start of the year, Indonesia has reduced its domestic export quota to 1:6 from 1:8 as a preventive measure against the potential increase in domestic cooking oil prices. Demand generally rises during Ramadan and Eid, which will fall in March and April this year.
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While this should be positive for prices, the analysts do not expect actual export volumes to be impacted significantly, as it will be a low crop season in the first quarter of the year.
Indonesia has also delayed its B35 biodiesel mandate start date to Feb 1, from the previously announced January. However, the total allocation for 2023 remains at 13.15 million kiloliters (m kL), up 20% from 2022’s 11m kL.
Simadiputra highlights that palm oil companies performed well in 2022, despite tapering off in 2HFY2022. With the absence of unusually high prices, the analyst expects earnings to generally trend lower y-o-y moving forward, albeit much better than 2019 to 2022 levels.
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“We believe production expansion will help offset the still high fertiliser cost and provide good earnings and cash flows at our selling price assumption of US$850 ($1,130) per metric tonne in 2023,” he adds.
Within his coverage in the region, Simadiputra likes First Resources and Bumitama Agri due to their younger age profile coupled with strong profitability performance, which helps them to strive during CPO downturn and reap the benefit the most during bull price cycle.
He notes that First Resources and Bumitama Agri’s profitability performance outperform its upstream plantation peers, despite both also trading below their five years average PE multiple. His target price for First Resources and Bumitama Agri are $2.50 and $1 respectively.
Meanwhile, DBS also likes Wilmar due to its significance on the Asian vegetable oil supply chain. However, Wilmar is trading at -2 standard deviation of its five years average PE multiple, a multiple around its upstream plantation companies’ peers traded, which in DBS’ view is unfair considering its integrated business platform.
“We believe Wilmar’s investments in midstream edible oil refining facilities, as well as downstream to consumer products, are largely not priced in for now,” adds Simadiputra, with a target price of $6.67.
RHB continues to favour integrated players like Wilmar, while also seeing value in players like Bumitama Agri and Golden Agri-Resources. Their target prices for Wilmar, Bumitama Agri and Golden Agri are $5.40, 80 cents and 33 cents respectively.
As at 11.15am, shares in Wilmar, Golden Agri, Bumitama Agri and First Resources are trading at $4.12, 24.5 cents, 61 cents and $1.43 respectively.
