How Singapore’s Food and Agriculture Stocks Could Be Impacted By The World Food Supply Shock – Wilmar; Olam; Golden Agri-Resources; Japfa

Following Malaysia’s announcement that it will ban chicken exports from 1 June 2022, multiple Singapore supermarkets and wet markets saw their shelves cleared out of fresh chicken. Amidst the speculation that the price of chicken will increase due to supply constraints, several people have taken to Carousel to list chicken at significantly marked-up prices. One user listed a ”rare limited fried chicken” for $3,000, adding to the description: ”Last chance to taste chicken before it becomes extinct for months to come.” While this is obviously a joke (we think?), it indicates the sentiments that many of us may currently be feeling, and that is prices of food would be on the rise in the months to come.

While such a doomsday scenario is unlikely to occur after FairPrice’s reassurance of a 4-months stockpile of frozen chicken, the chicken panic unveils the beginnings of a global food crisis. From Manhattan to Malaysia, prices of meat, vegetable oil and cereal products are increasing at the fastest pace ever – a United Nations gauge of world food prices has jumped more than 70% since mid-2020.

Supply chain disruptions, the Ukraine-Russia war, and climate change effects have resulted in a triple whammy on food prices, which are not expected to cool down for at least till 2023.

Given such a macroeconomic climate, investors are lining up investments in the food and agriculture space to help them preserve their purchasing power. Exchange-traded funds (ETFs) such as First Trust Nasdaq Food & Beverage ETF and iShares MSCI Global Agriculture Producer ETF saw a record inflow of funds in the past month. Similarly, shares of U.S. poultry producers such as Pilgrim’s Pride Corp (NASDAQ: PPC) and Tyson Foods Inc (NYSE: TSN) are rising.

For our local food and agricultural stocks, what better time to delve into these companies than now?

In this edition of 4 Stocks This Week, we cover 4 companies that would be impacted by food inflation and food protectionism, namely: Wilmar (SGX: F34), Olam (SGX: VC2), Golden Agri-Resources (SGX: E5H), Japfa (SGX: UD2).

Company	Market  Cap	Annual Revenue	Price/Earnings	Dividend Yield
Wilmar	S$26.83B	US$65.79B	10.13	3.73%
Olam	S$5.80B	US$34.31B	8.39	5.82%
Golden Agri-Resources	S$3.72B	US$10.18B	4.18	7.32%
Japfa	S$1.24B	US$4.60B	10.25	1.68%

Wilmar International (SGX: F34)

With a $26.83B market capitalisation, Wilmar International (SGX: F34) is the fifth-largest company on the SGX and a Fortune 500 agribusiness company. It is involved in the entire value chain of the agricultural commodity business, from cultivation, to processing, to distribution of a wide range of edible food products and industrial agri-products. Wilmar counts a workforce of over 100,000 staff at over 1,000 manufacturing plants in 32 countries.

In FY2021, it achieved its best results since listing on the SGX, where revenue increased by 30.2% to US$65.79 billion, and EBITDA income rose by 15.6% to USD $1.89 billion. The strong performance was attributed to its Feed & Industrial Products, and Plantation & Sugar Milling segments.

With the Ukraine-Russia war driving up prices for animal feed and fertilisers, and Indonesia, India restricting exports of palm oil and sugar, respectively, these two segments are expected to continue to outperform in 2022. Overall, Wilmar is expected to be a net beneficiary of food inflationary pressures, capitalising on high raw material costs and better vegetable oils refining margins.

To pile on the good news, Wilmar’s joint venture, Adani Wilmar Limited (AWL), was the most successful IPO in Asia this year – tripling in value since its debut. That helped Wilmar to notch an exceptional gain of US$175.6 million from the dilution of interest in AWL. Meanwhile, Wilmar’s China subsidiary, Yihai Kerry Arawana (YKA), is hastening its expansion. YKA’s development rides on China’s growing food industry, where domestic consumption of oilseeds and other food products is soaring. By adding together Wilmar’s 90% stake in YKA and 44% stake in AWL, CGS-CIMB Research analysts Ivy Ng values Wilmar at an 89% premium. This coincides with management’s note in its 2021 annual report, where the company unveiled it has bought back S$130 million of its own shares and will continue to do so as long as it believes that its shares are underpriced.

Wilmar’s share price is currently $4.19, up slightly from $4.17 at the start of this year.

Olam International (SGX: VC2)

Olam Group (SGX: VC2) is a leading food and agribusiness operating across the value chain for 20,900 customers in 70 countries. Like Wilmar, Olam is a Fortune Global 500 company, with a majority stake that’s owned by Temasek (52%). The company engages in the sourcing, processing, packaging and merchandising of agricultural products. It consists of 2 main business segments: Olam Food Ingredients (OFI), and Olam Agri.

In its latest annual report, Olam reported a 31.2% rise in revenue to S$47.00 billion and an EBIT income increase of 33.0% to S$1.42 billion. This robust financial performance was helped by higher commodity selling prices in 2021. Going forward in 2022, Olam Agri is expected to benefit from the growing demand for food, feed, fibre, and other staples amongst rising global food insecurity.

Furthermore, at a time of volatile fertiliser prices and uncertain demand outlooks, farmers are more stressed than ever about which crop to plant. To provide farmers with such support, Olam has launched Jiva, a digital platform containing an ecosystem of farming advice, financing and trade services. In 1Q 2022, Jiva’s Agricentral app surpassed 7 million farmers in India, becoming one of the largest farmer advisory platforms in the country. In the short term, we can expect Jiva’s user base to increase further as farmers use it to navigate the increasingly challenging growing environment.

However, Olam Group’s stock recently hit its 52-week low as it faces troubles with its reorganisation plans. Initially, OFI is intended to spin-off from Olam Group with a primary listing in London and a secondary listing in Singapore in the second half of this year. But citing market volatility, the IPO is delayed. On the other hand, Olam Agri is selling a 35% stake to a Saudi Arabian fund for S$1.24 billion. This could free-up significant funds for Olam Group’s restructuring and reinvestment into the business.

Olam’s share price is currently $1.59, down about 9% from $1.75 at the start of the year.

Golden Agri-Resources (SGX: E5H)

Golden Agri-Resources (GAR) (SGX: E5H) is a leading Indonesian agribusiness primarily focused on palm oil production and its subsequent processing into consumer and industrial products such as cooking oil and bio-diesel. Similar to Wilmar, GAR manages the entire value chain, from the origination of palm raw materials to the destination market. This allows it to reap higher margins and gain better control, as well as a more resilient supply chain.

GAR achieved a record full-year performance in FY2021, with revenue up 44% to US$10.18 billion and EBITDA income jumping by 81% to US$1.21 billion. Its sterling results were attributable to the continued appreciation of crude palm oil (CPO) market prices. During 1Q2022, CPO prices increased by 49% compared to the same quarter last year.

Unfortunately for GAR, a palm oil export ban from the Indonesian government on 28 April 2022 in order to meet the local demand and to curb the rising price of palm oil in the country meant that earnings for the company in the short-term could be impacted. This 3-week ban was lifted on 23 May 2022 which is good news for investors.

Instead of an outright ban on palm oil exports in April, the government now requires companies to reserve a share of their palm oil outputs for the local market before they can export the rest. This removes the limit on GAR’s profit upside as it can continue to sell its palm-based products globally, though the current export volume is half of that prior to the ban.

Furthermore, demand and supply forces are working in GAR’s favour. The Indonesian and Malaysian governments remain committed to maintaining the current percentage requirement of palm oil in biodiesel, despite the high palm oil prices. Meanwhile, GAR’s two biggest Malaysian rivals are encountering sluggish production. With demand still high and supply remaining low, high CPO prices are forecast to persist, spelling good news for GAR investors.

GAR’s share price is currently $0.28, up about 14% from $0.28 at the start of the year.

Japfa Group (SGX: UD2)

Japfa (SGX: UD2) is a Singapore-based agri-food company dedicated to feeding emerging Asia with essential proteins. The company specialises in 5 staple proteins: chicken, pork, beef, fish and dairy. Its business is vertically integrated from animal feed production and breeding to commercial farming and food processing. Today, Japfa holds leading market positions across multiple protein foods – from poultry in Indonesia to raw milk in China.

Japfa’s revenue in FY2021 crossed the US$4.6 billion mark – increasing by 19.9% year-on-year. But its EBITDA income declined by 1.6%. Japfa’s CEO attributed the decline in profits to global high animal feed prices, a resurgence of African Swine Fever in Vietnam, and the higher cost of sales. Other companies are faring the same. Charoen Pokphand Foods, one of Thailand’s largest meat producers, saw revenue rise by 16% but EBITDA dropped by 30%.

In the short term, Malaysia’s decision to halt chicken exports could result in more client traffic to Japfa. Along with that, the higher price of poultry will improve Japfa’s profit margins. In the long term, as the economies of Southeast Asia rebound from the pandemic, household income will increase. Given the strong positive correlation between income levels and meat consumption, Asia Research and Engagement estimates that meat consumption in the region will grow by 33% by 2030. With Japfa’s growth strategy firmly focused on emerging Asia, it can leverage extensively on this favourable market trend.

To further focus its financial resources on the animal protein business, Japfa has applied to list its dairy unit, AustAsia, on the Hong Kong stock exchange. If successful, eligible shareholders will receive AustAsia shares in proportion to their holdings in Japfa. The listing is expected to unlock value for shareholders as AustAsia is valued by Japfa to be S$0.49 per share, while Japfa’s animal protein segment is valued at S$0.49 per share, which, combined, exceeds Japfa’s current S$0.60 share price.

Japfa share price is currently $0.60, down slightly from $0.62 at the start of the year.

The Bottom Line

Overall, we have covered the performances and outlooks faced by these 4 agribusinesses. We see that they are specialised in different segments of the food business and have different plans for growing their sales. With the current food supply shocks, each company stands to benefit or lose out to a different degree. It will depend on many factors, but primarily it comes down to their cost management process, and the pricing power they have to pass on the higher costs.

Read Also: Looking To Trade Gold, Silver & Nickel: Beginner’s Guide To Commodity Trading In Singapore

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