Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Sep 2019, 9:22 PM


Bumitama Agri - Lowering CPO Prices; Downgrade to NEUTRAL

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  • Downgrade to NEUTRAL from Buy, new SGD0.60 Target Price from SGD0.80, 3% downside but with 3% FY19F yield, based on an unchanged 2019F peer average P/E of 11x.
  • We cut CPO prices for 2019F to MYR2,200 from MYR2,500 and for 2020F to MYR2,400 from MYR2,500. While CPO prices are likely to be relatively unexciting in 2019, downside risks are limited from hereon, as demand is picking up, while inventory should start moderating in 1Q19.
  • Post-earnings revision, valuations look fair.

Sudden Fall in CPO Prices Unexpected

  • 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.
  • We believe the sudden drop in prices was due to the continued rise in CPO stock levels in Malaysia to 2.72m tonnes in October and the decline in crude oil prices from a high of USD84/barrel one month ago to USD54/barrel currently.

CPO Stock Levels Should Start Declining Soon

  • CPO stock levels should start declining soon as we enter the low season of production for CPO. That, and the increased demand contributions from biodiesel and India in 2019, should start to have a positive impact on prices come 1Q19. However, while we expect some form of price recovery in 1Q19, CPO prices should not jump significantly – as stock levels will need some time to normalise (stock/usage ratios still at 13.8% vs the historical mean of 9.6%).
  • In addition, external risks still abound, in the form of trade war uncertainties, crude oil prices and trade policies by producing and consuming countries.

Five Key Factors to Look Out for in 2019

  • Five key factors to look out for in 2019 are
    • a 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).

Another Unexciting Year for CPO Prices

  • 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.

We Cut CPO Prices for 2019F

  • We cut CPO prices for 2019F to MYR2,200/tonne (from MYR2,500) and to MYR2,400/tonne (from MYR2,500) for 2020F.
  • All in, our earnings forecasts are now lower by 20-25% for FY19-20. Although we believe CPO prices are likely to be relatively unexciting in 2019, we also believe downside risks are limited from hereon. We expect CPO to trade at MYR1,800-2,400/tonne for 2019. We make no changes to our FY18 price forecast.

Downgrade to NEUTRAL

  • Downgrade to NEUTRAL with a lower Target Price of SGD0.60 (from SGD0.80), based on an unchanged target 2019 P/E of 11x – in line with the peer and historical average. This implies EV/ha of USD10,000, which is at the low end of its peers’ USD10,000-15,000/ha range.
  • Post-earnings revision, valuations now look fair at 2019F P/E of 11x, in line with historical average of 11-12x.

Source: RHB Invest Research - 10 Dec 2018

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