Wilmar's China consumer sales steady throughout lockdown

But this is an increasingly strenuous undertaking for the Indonesian government. Its oil palm plantation fund management agency BPDPKS supports the B30 mandate by bridging the gap between prices of conventional diesel and locally-produced palm oil biodiesel. The price difference between these products has grown to INR3,732 per litre, from just INR444 per litre in 2019. Reported to have only around INR19 trillion at the end-December 2019, analysts estimate that BPDPKS may be unable to support the 9.6 million kilolitres of biodiesel needed to meet B30.

In any case, there is support for the industry but the actual effect will vary. “We are of the view that this is neutral for upstream planters and positive for downstream players due to the widening export levy between processed palm oil and crude palm oil (CPO),” CGS-CIMB analysts Ivy Ng and Nagulan Ravi said in a May 19 note. Analysts also estimate CPO to head lower into 3Q2020 as seasonal output increases, before picking up towards the year end. As of May 18, CPO was at RM2,142 ($696.95) per tonne.

Off the starting block
Industry dynamics aside, the various Singapore-listed palm oil players — due to their different earnings profiles — have reported a mixed bag of 1QFY2020 numbers over the past fortnight. DBS analysts William Simadiputra and Low Jin Wu believe Wilmar International will be the biggest winner from present soft commodity prices, as it captures a longer value chain stretching downstream and will enjoy “favourable input costs” and thereby widening its margins.

Indeed, the blue chip got off to a promising start for the year, with core net profit improving 22.5% y-o-y to US$306.5 million for 1QFY2020, though reported net profit fell 12.7% y-o-y due to mark-to-market losses on its investment securities. The better numbers can be attributed to its strong tropical oil downstream operations and healthy demand for its consumer products in China. This was in spite of weaker demand from business users such as hotels and restaurants that were locked down. “Demand for the group’s consumer products grew amidst the Covid-19 pandemic as household consumption increased due to the implementation of movement restriction measures globally,” says Wilmar.

Sales in its consumer products rose 34.8% y-o-y to 2.9 metric tonnes, though this was offset by a 20% reduction in sales volume of medium pack and bulk products. Wilmar’s strength in consumer products has been attributed to the strategic location of its processing facilities and strong distribution network.

“This competitive advantage allows Wilmar to produce and restock its consumer products at retail distribution centres at a faster pace than some of its peers when movement is restricted. This also provided Wilmar with the opportunity to sell its products to a wider audience as consumers are cooking more at home,” says CGS-CIMB’s Ng.

Still, Wilmar posted a slower EBITDA improvement of 9.6% y-o-y in 1Q2020 vis-a-vis a core net profit jump of 22.5%, which could have been due to higher associates’ earnings or lower taxes or minority interests.

Nevertheless, given the resilient business, coupled with the impending IPO of its Chinese subsidiary Yihai Kerry Arawana (YKA), Ng is keeping her “add” call on Wilmar, with a target price of $4.58.

For similar reasons, RHB’s Juliana Chai names Wilmar her “top country pick”, with a price target of $4.83. Meanwhile, Maybank Kim Eng’s Thilan Wickramasinghe says Wilmar will suffer a 2% to 12% drop in its FY2020 and FY2021 earnings. But with a valuation of $4.12 — down from $4.37 previously — the stock is a “buy” for him. OCBC’s Chu Peng however estimates the blue chip’s fair value is $4.54, down slightly from $4.64 previously

Bumitama Agri also reported a bullish start to 1Q2020, with consolidated net profit (NPATMI) more than doubling by 136.9% y-o-y to INR262.1 billion. Even though its sales volume has decreased, the company was able to keep costs under control and took advantage of higher CPO prices.

They also suffered from a weakened rupiah vis-a-vis the US dollar. The management also noted a reduction in selling expenses in 1Q2020 due to a decrease in sales volume for palm products. “Bumitama did not disclose the forex loss recorded in 1Q2020 but it would have been sizable as the rupiah had weakened against the US dollar by around 18% q-o-q,” says Ong Chee Ting of Maybank Kim Eng.

With CPO prices being an important driver of growth, Simadiputra of DBS has cut his estimates of Bumitama’s FY2020/2021 earnings by 9% and 11% to INR 730 billion and INR 763 billion respectively, on the back of higher input costs associated with a weakened rupiah. Yet, despite fresh fruit branches (FFB) output remaining flat in 1Q2020 owing to dry weather in 3Q2019, management expects higher output in 2H2020. Simadiputra from DBS also expects the maturity of 4,000 hectares worth of trees likely to be a stronger catalyst of growth than CPO price recovery.

With the youngest trees vis-a-vis peer competitors, Bumitama’s future output growth is likely to be positive, with FFB output CAGR forecasted to be 5.2% between FY2019 and FY2022. Simadiputra is keeping his “buy” call on the stock with a large 52% upside despite lowering his target price to $0.66 from $0.81, arguing that concerns over CPO prices amid weakened demand as a result of Covid-19 have now been priced-in. For Maybank Kim Eng’s Ong, Bumitama is also deemed a “buy” on the strength of the counter’s strong CAGR potential of 47%. RHB Singapore’s investment team, meanwhile, prefers to maintain a more cautious “neutral” call, citing expectations that FFB output will remain weak this quarter.

Gold that does not glitter

In contrast, Golden-Agri Resources (GAR) endured a torrid 1Q2020, with its share price now sitting at $0.14 just off its 52-week low of $0.13. Its revenue improved slightly to US$1.66 billion, but it sustained a core net loss of US$25 million. This disappointing performance came off the back of a quarter of profit in 4Q2019 following net core losses in 4Q2018.

In its earnings announcement last week, GAR said it benefited from higher CPO market prices and that its plantations and palm oil mills operations contributed most of its earnings. However, it also said Indonesia’s new CPO export tax and levy and foreign exchange losses dragged the company back into the red.

“The disappointment came from significantly lower downstream contributions (almost 100% lower y-o-y), offset by flattish upstream numbers. FFB production declined 5% y-o-y in 1Q2020, while CPO prices rose 28%,” said RHB’s Singapore research team. CGS-CIMB’s Ng and Ravi agree, noting that GAR’s downstream division was barely EBITDA positive in 1Q2020, in contrast to the profitable 4Q2019’s US$94 million EBITDA.

“We gather that this is partly because GAR’s downstream was stocking up on CPO (its key raw material) in anticipation of a price rally in 1Q2020 on tight supply. However, it was caught by the Covid-19 outbreak, which led to demand disruption in its key destination markets, such as China and India, due to various restricted movement orders. This had affected their ability to sell its CPO inventory,” notes the two CGS-CIMB analysts, who also observed a sharp CPO price reduction in March due to movement restrictions which eroded GAR’s inventory value.

Agreeing, OCBC’s Chu adds: “Logistics cost was higher in 1Q with lockdowns of ports in major destination countries [such as] China and India.” The Covid-19 shock resulted in a significant rise in logistics costs worldwide, as flagging consumer demand saw businesses clamour for warehouses and storage spaces to hold their unexpected inventory build-up.

GAR’s woes will likely be somewhat mitigated by Indonesia’s commitment to B30, which will support its downstream operations and support a slow recovery of CPO prices towards the end of this year. While RHB expects biodiesel funding to run out by 4Q2020, GAR’s supply allocation to Indonesia’s state-oil company Pertamina of 780,000 kilolitres of oil for 2020 (41% higher than the 554,000 kilolitres in 2019) will likely ensure some demand stability in the year ahead.

Still, analysts remain cautious on GAR. Chu has lowered her earnings forecast for FY2020 and FY2021 by 80% and 28% respectively for FY2020/2021. While most analysts recommend that investors divest their GAR holdings, Chu has maintained OCBC’s “hold” call in hopes of a second half CPO price rally and a belief that the impacts of Covid-19 have been adequately priced in, though she cut her fair value from $0.22 to $0.14.