SINGAPORE (Dec 10): RHB Research is downgrading its recommendation on Bumitama Agri to “neutral” from “buy” with a lowered target price of 60 cents from 80 cents previously.
This came on the back of possible unexciting crude palm oil (CPO) prices in 2019, while downside risks are limited from hereon, as demand is picking up and inventory should start moderating in 1Q19.
In a Monday report, RHB Research analysts say, “CPO prices have surprised us and we believe, the market on the downside, having fallen to a low of MYR1,717/tonne on 21 Nov (from a relatively stable MYR2,000-2,200/tonne for the past 4 months), before recovering slightly to MYR1,800/tonne currently.”
According to RHB, the sudden drop in prices was due to the continued rise in CPO stock levels in Malaysia and the decline in crude oil prices a month ago.
However, as the low season of CP production is nearing, CPO stock should also start declining. Along with the increased demand contributions from biodiesel and India in 2019, CPO prices should start to see some positive impact come 1Q19.
While some form of price recovery is expected in 1Q19, CPO prices should not jump significantly, as stock levels will require some time to normalise.
In addition, external risks still abound, in the form of trade war uncertainties, crude oil prices and trade policies by producing and consuming countries.
RHB says that there are five key factors to look out for in 2019: trade war ceasefire (negative), logistics issues being resolved in Indonesia and the country’s new export duty structure (mixed), crude oil prices and biodiesel demand (positive, but depending on gasoil prices), India’s impending reduction on import duty on CPO (positive) and potential weather extremities (positive).
“Overall, we believe this mixed bag of key factors will result in another relatively lacklustre year for CPO prices. On the whole, while we expect to see demand for both the eight vegetable oil complex and the 17 oils & fats complex improve, thereby lowering stock/usage ratios in 2019F, we believe stock/usage ratios need to be lowered to at least historical levels before prices can significantly improve,” says RHB.
With this, RHB has cut its CPO prices estimates for 2019F to MYR2,200/tonne from MYR2,500/tonne previously. Earnings forecasts are also lowered by 20-25% for FY19-20.
As at 11.20am, shares in Bumitama Agri are trading at 64 cents or 1.3 times Dec 19F book with a dividend yield of 3.1%.
