RHB Group Research analyst Hoe Lee Leng has maintained “neutral” on the plantation sector with a “buy” call on Wilmar International, aside from liking Bumitama Agri on valuation grounds.
In her April 12 note, Hoe says that a trading strategy is best for the sector, in light of the volatility in crude palm oil (CPO) prices. “While supply risks are still imminent from the ongoing war, demand risks are also prevalent given the current demand rationing and possibility of biodiesel mandates being cut,” she adds.
Supply and demand of vegetable oils continue to look tight for 1HFY2022, keeping prices elevated, says Hoe. Nevertheless, RHB notes that stock/usage ratios for the major vegetable oil complexes and CPO are expected to improve in 2022, implying that CPO prices should moderate in 2HFY2022.
DBS Group Research analyst Willam Simadiputra concurs, adding that poor soybean harvest in South America and trapped sunflower oil in the Black Sea will continue to support CPO prices. He maintains his “buy” call on Wimar, Bumitama Agri and First Resources.
As uncertainties abound in the plantation sector, RHB believes there are three wild cards that could affect supply and prices significantly — the Russia and Ukraine war’s impact on oilseed output and commodity prices; fertiliser availability; as well as labour issues in Malaysia.
Russia and Ukraine are two large producers of sunflower seeds, aside from producing some small amounts of soybean and rapeseed. Together, they produced 40 million tonnes of oilseed in 2021 or 7% of total global oilseed supply. In 2022, this is forecasted to rise to 46 million tonnes or 8% of global supply.
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“Should Ukraine planting not take place, the stock/usage ratio for 10 oilseeds could fall further. Based on current forecasts, the stock/usage ratio of the 10 oilseeds is already expected to decline to 16.5% in 2022, after taking into account the La Niña impact in South America in 4Q2021/1Q2022,” says Hoe.
The spring planting season in Ukraine started in April in 22 regions, covering a total of 803,200 hectares. However, this amounts to just under 6% of the originally projected total area for main spring crops, which is estimated at 13.4 million hectares, 3.5 million hectares less than last year.
Hoe highlights that it is unclear how many more areas will be able to be planted, given the current circumstances. If planting is abandoned for the remaining areas, the stock/usage ratios of the 10 oilseeds, as well as 17 oils and fats, would be badly affected.
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“Assuming the worst-case scenario of zero planting, we estimate the stock/usage ratio of the 10 oilseeds could fall to as low as 13.6% in 2022, below the historical average of 16.1%,” she adds.
Meanwhile, Russia and Belarus are large fertiliser producers, together producing more than 50 million tonnes of fertilisers a year or 13% of global total. Although fertiliser was still able to be exported from Russia up to March, it has since banned exports of fertiliser.
If supplies from Russia and Belarus remain unavailable, planters would need to change the composition of fertiliser application. Hoe notes that most planters have some carry forward stock of fertilisers from 2021 but it would only last them through to part of 1HFY2022. Production of vegetable oils will be affected in 2023 if fertiliser supplies are unavailable.
Over in Malaysia, labour issues continued with shortages estimated between 10%-35% currently. Although the government has signed several government-to-government agreements to bring in some 32,000 workers for the industry, RHB believes this is likely to happen at the end of 1HFY2022.
If the shortage is not addressed, Malaysia output will be affected again in 2022 while production could see a third consecutive year of decline. Current estimates for Malaysia output for 2022 is 3%-4% growth to 18.5 tonnes, says Hoe.
On the demand side, there are three main risks that can derail the balance, notes Hoe. These are high prices causing inflationary pressures, demand rationing particularly in price sensitive countries, and the food versus fuel debate, which argues whether biodiesel mandates should be maintained amidst supply shortages and high prices.
In terms of earnings momentum prospects, DBS’s Simadiputra believes palm oil companies will post higher y-o-y earnings growth in 1QFY2022 on better selling prices. Bumitama Agri and First Resources will enjoy higher CPO selling prices due to no hedging exposure while Wilmar will continue to perform, led mainly by its tropical oil refining division.
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Hoe’s target prices for Wilmar, Bumitama Agri, First Resources and Golden Agri are $5.30, 90 cents, $2 and 31 cents respectively while Simadiputra’s target prices for the first three names are $6.67, $1, and $2.02 respectively.
As at 11.17am, shares in Wilmar, Bumitama Agri, First Resources and Golden Agri are trading at $4.59, 77 cents, $2.03 and 31 cents respectively.
Photo: Bloomberg
