Given expectations of volatile CPO prices, RHB is favouring Wilmar due to its integrated and diversified business model.
The price of crude palm oil (CPO) has fallen drastically on the unwinding impact of Indonesia’s export ban as well as fears of recession which has brought down all commodity prices.
To this end, RHB Group Research analyst Hoe Lee Leng has tweaked her CPO price assumptions down for 2022 to RM5,100 per tonne from RM5,300 per tonne previously.
RHB believes that the CPO price decline is slightly overdone, having fallen by 44% in seven weeks — more than the drop in soybean, crude oil and wheat prices at 31%, 17% and 16% respectively.
“While regulatory risks still exist, particularly for players in Indonesia, supply concerns could continue to haunt the sector for the rest of 2022 — given the logistics backlog in Indonesia, slow exports out of Ukraine and the labour shortages in Malaysia,” says Hoe.
For 2023, RHB expects fundamentals to continue improving. On the assumption that labour shortages are resolved to a certain degree and the Ukrainian oilseed output is able to be exported out smoothly, CPO prices could fall to lower levels next year, says Hoe.
“However, we believe support from higher biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above RM3,000 per tonne in the medium term,” says Hoe.
As such, she lowered her 2023 assumptions to RM3,900 per tonne from RM4,300 per tonne, while 2024’s assumption of RM3,500 per tonne assumption remains unchanged.
While ESG concerns are still present, it may have taken a backseat, says Hoe. “However, the ESG discounts we previously assigned to valuations are still in place.”
RHB has reassessed its ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From its analysis, RHB highlights that the progress in mitigating ESG issues is still lagging while better disclosures on ESG-related information have been made over the years.
“As a result, we have made some upward adjustments to the ESG score for some companies that have made progress but we highlight that some companies have remained relatively stagnant in their ESG efforts, while some have even reduced disclosures,” says Hoe.
RHB has maintained its “neutral” call on the plantation sector with a trading strategy. Hoe notes that share prices have reacted negatively to the recent CPO price decline, resulting in average P/Es of the planters under its coverage shrinking to 10x 2023.
“Although there could be more downside in 2HFY2022 as CPO prices moderate further, valuations for some planters are starting to look more interesting at these levels,” says Hoe.
Keep ‘buy’ on Wilmar and Bumitama
Given RHB’s expectations of volatile CPO prices, it is favouring Wilmar International due to its integrated and diversified business model with cheap valuations. Wilmar is trading at 10x FY2023 P/E, well below its big-cap peer range of 14x-16x.
“We continue to believe Wilmar is undervalued, as its combined stakes in Yihai-Kerry and Adani Wilmar are double that of its current market cap,” says Hoe.
She adds that Wilmar remains as RHB’s ESG champion, with excellent ESG disclosure and decent progress in recent years. Hoe maintains “buy” on Wilmar with a new sum of the parts (SOTP)-based target price of $4.95 from $5.05. This includes a 2% ESG premium, based on an ESG score of 3.1.
Hoe has also kept her “buy” call on Bumitama Agri. Due to its improving ESG disclosure as well as reduced greenhouse gas emissions and water intensity, RHB has upgraded Bumitama’s ESG score to 2.6.
Its valuations also remain attractive, as the counter is trading at 6x FY2023 P/E, at the lower end of its peer range of 6x-11x. Hoe’s new target price for Bumitama is 71 cents from 95 cents previously, based on a FY2023 P/E target of 7x. The target price also builds in an 8% ESG discount.
Meanwhile, Hoe is keeping “neutral” on Golden Agri-Resources with a new SOTP-based target price of 29 cents from 30 cents, maintaining its ESG score for the counter at 2.7. While Golden Agri has managed to reduce its greenhouse gas emissions intensity by 25% from 2018 to 2021, its water intensity has risen by 15% in the same period.
She points out that the stock is fairly valued, trading at 7x FY2023 P/E, in line with its peer range.
RHB’s last Singapore planter under coverage First Resources has provided good disclosures in relation to ESG. Efforts have been made to reduce greenhouse gas emissions in recent years, but progress in resource efficiency and obtaining certifications is rather slow, says Hoe. As such, she maintains its 2.6 ESG score.
Hoe maintains “neutral” on First Resources with a lower target price of $1.50 from $2.20, based on a FY2023 P/E target of 8x.
To note, First Resources on August 11 announced a strong set of results boosted by higher average selling prices. It reported earnings of US$128.0 million for the 1HFY2022 ended June, nearly four times higher than the earnings of US$32.6 million in the previous corresponding period.
As at 2.24pm, shares in Wilmar, Bumitama, Golden Agri and First Resources are trading at $4.18, 64.5 cents, 28 cents and $1.46 respectively.