SINGAPORE (Apr 22): UOB KayHian expects interest in palm oil planters such as Golden Agri-Resources, First Resources and Bumitama Agri to rebound, driven largely by a more positive view on CPO prices.
Year to date, share prices in Singapore-listed plantation companies have outperformed regional peers, after two years of underperformance versus regional peers. Interest in the palm oil sector has improved with the recovery in prices and potentially lower production.
For Wilmar, its recent buying interest can be attributed largely to the potential re-rating from its China IPO.
“We believe share prices have bottomed and we reckon that there might be more upside,” says lead analyst Leow Huey Chuen is a recent report, “We maintain our view that CPO prices in 2019 will be stronger on the back of: a) lower production, b) strong demand for biodiesel, c) lower soybean crushing, and d) lower rapeseed and canola production,” says Leow.
In addition, Singapore-listed plantation companies are trading at lower PE multiples than Malaysia peers. However, most of the Singapore companies will have better earnings and higher production growth in the coming years.
Production growth of Singapore companies came in higher in 2018 despite slightly lower earnings contraction than regional peers amid sluggish CPO prices in 2018 -- except for Golden Agri-Resources which has been given a “sell” by UOB.
All the estates of Singapore-listed plantation companies are in Indonesia and these estates have younger age profiles than that of Malaysia peers, contributing to higher production growth.
Average net profit y-o-y contraction in 2018 for Singapore listed plantation companies was only 17% vs Malaysia peers’ average of 47% y-o-y.
“This trend is likely to continue into 2019-20 and will enable Indonesia plantation companies to report better earnings growth,” says Leow.
Maintain “market weight,” says Leow, “Our CPO price assumption for 2019 is RM2,350/tonne.”
We believe there is still upside to Wilmar’s share price despite the 16% YTD rise as current share price is only factoring in 17x PE for its China operation.
“Our fair value of $3.90 for Wilmar factors in 20x PE for its China operation. Assuming 23x and 25x PE, our fair value would be at $4.10 and $4.25 respectively.”
As at 11.43am, shares in Wilmar are up 1 cent at $3.65 while shares in Bumitama Agri are up 0.5 cent at 72 cents.
