Regional Plantation Companies: Temporary price retreat
- CPO price tumbled after Indonesia resumed CPO exports
- Indonesia biodiesel programme and lower levies to support domestic price and global CPO demand
- Indo-Singapore CPO stocks trading at single digit PE
- Maintain BUY for First Resources (FR), Bumitama (BAL), Lonsum (LSIP), and Wilmar (WIL)
Indonesia’s CPO inventory liquidation derailed CPO price. Indonesia’s domestic CPO price dropped to Rp8,000/kg level in early July – lower than the 1H22 average of Rp14,918/kg – due to the revoked export ban and US$200 per tonne ‘flush-out’ scheme extra charges. Indonesia exporters rushed due to limited storage capacity, and thus crashed domestic CPO price and put pressure to global CPO price benchmark.
Malaysia inventory climbed 9% m-o-m to 1.65m MT (+3% y-o-y). Higher inventory was driven by a 12% m-o-m lower export volume of 1.19m MT (-16% y-o-y). Meanwhile CPO production volume climbed by 6% m-o-m to 1.55m MT (-4% y-o-y). Malaysia’s CPO export volume was affected by excess volume from Indonesia, which also affected Malaysia’s CPO benchmark price.
We think current CPO price downturn is temporary. We believe the situation is temporary, as the current vegetable oil price remains strong as seen on wide gap to soybean oil price. Furthermore, Indonesia is likely to increase biodiesel blending to B35 to reduce national energy subsidies and push CPO price to recover. Moreover, major importing countries such as China and India held a relatively low CPO inventory in June 2022.
Market priced in weaker earnings in 2H22. While we believe the current CPO price correction is temporary, CPO stocks affected by the drop in Indonesia’s domestic CPO price may affect 3Q22earnings performance. However, we believe any weaker-than-expected earnings already priced in at current share price level. Meanwhile, Indonesia and Singapore-listed CPO stocks are trading at single digit PE 6.7x-8.5x, which we believe is undemanding. The key downside risk to our forecast is any worse-than-expected recession that can derail commodity prices in 2H22. Maintain BUY on FR, WIL, BAL and LSIP.