By Isabella Zhong
What do detergent, biodiesel and the good old Thanksgiving
pumpkin pie all have in common? The answer: Palm oil.
Palm oil is the world's most consumed vegetable oil, having
established itself as a mainstay in the processed foods industry
because it is typically cheaper than other vegetable oils. Well,
cheap has become a lot cheaper. The palm oil industry has endured a
one-third slide in palm oil prices since April, pummeling the
shares of Southeast Asian producers that operate the sprawling
plantations and processing facilities. While the industry courts
controversy due to environmental concerns, now may be a good time
for more adventurous investors to buy into stocks offering beaten
up valuations and exposure to an expected rebound in palm oil
prices.
It's been tough going for the industry as palm oil prices
slumped to a five year low of MYR1,917 a tonne in September, down
from around MYR3,000 a tonne in April. The industry has been hit
with bad news from all angles. A surge in palm oil output as
plantations have recovered from tree stress has dampened prices,
while the concerns about potentially bad weather affecting yields
has also receded. The fall in soybean and crude oil prices have
also weighed heavily as they compete for use in the food products
and energy industries. Meanwhile, moves to rein in China's shadow
banking industry through tighter credit standards has led to some
Chinese buyers defaulting on payments for shipments.
While the fall in palm oil prices has been welcomed by large
food product companies like Unilever (ULVR.UK), Nestle (NESN.CH)
and Mondelez (MDLZ), it's been no fun for palm oil stock investors.
Three quarters of listed plantation companies in Malaysia,
Indonesia and Singapore have underperformed their national
benchmark indices in 2014. Indonesia's BW Plantation (BWPT.ID) is
the most notable laggard, with its share price having halved while
the Jakarta Composite Index rallied 23%.
Some analysts reckon the worst may be over for palm oil prices.
Credit Suisse's Tan Ting Min expects prices to recover to MYR2,400
by the end of the year, and then increase to MYR2,600 in 2015.
Severe droughts earlier this year in the Malaysian Peninsula and
the Indonesian island of Sumatra, two major palm oil producing
regions, means supply is likely to be squeezed in 2015. Demand is
also likely to be boosted by pro-biodiesel policies in Indonesia
and Malaysia, while China is expected to resume purchases after
palm oil inventories were drawn down by two-thirds from a recent
peak. There are positive signs, with palm oil prices having
rebounded 14% from their lows to MYR2,200 a tonne.
Credit Suisse's Tan likes young plantations with strong organic
growth and views Singaporean and Indonesian-listed companies, which
were sold off the most, as offering the best value. Singaporean
palm oil stocks are trading on projected price-earnings ratios that
are about 17% below their long term average. Indonesian plantations
trade at about 8% below their average. Although estimated
price-to-earnings ratios for Malaysian listed plantations have also
declined this year, they remain above the long term average.
Tan's top picks are Bumitama Agri (BUMI.SI), Astra Agro Lestari
(AALI.ID), Dharma Satya Nusantra (DSNG.ID) and Genting Plantations
(2291.MY). Singapore-headquartered Bumitama's share price is down
14% from where it was in August. Currently trading at just under
SGD1.07, the stock is priced at 13 times forward earnings. Brokers
surveyed by FactSet have a target price of SGD1.42, which implies
around 33% upside.
The company is getting steady production growth from its
maturing plantation estates and is expected to expand earnings 13%
each year over the next three to five years. Maybank analyst Ong
Chee Tiang, who has a buy rating on the stock, argues Bumitama
could lift dividend payouts as its capex requirements ease.
Indonesia's Astra Agro Lestari is another palm oil stock
attracting attention given its shares are down 18% since mid-June.
Brokers expect the stock to rebound to around IDR26,600 a share,
which implies 11% upside from the current price of around IDR23,900
a share. DBS analyst Ben Santoso, who has a hold rating, notes a
recently inked joint venture with palm oil processor Kuala Lumpur
Kepong (2445.MY) could benefit Astra Agro Lestari. The stock
currently trades at around 14 times projected earnings.
Credit Suisse analyst Priscilla Tjitra likes Dharma Satya
Nusantra, rating it an outperform given expectations it could
generate a 30% return on equity over the next two year. "We like
the company for its upstream palm oil exposure, young and growing
profile and its relationship with the local community, which
ensures stability of its earnings growth," argues Tjitra. She has a
target price of IDR4,600 a share, which implies around 18% upside.
The stock currently trades at around INR3,900, which is equal to 11
times projected earnings.
Another young and growing company among Credit Suisse analyst
Tan Ting Ming's top picks is Genting Plantations, which is the one
of the youngest plantations in Malaysia. Moreover, Tan notes the
company's book is also undervalued. He says Genting's plantation
land bank in Kulai, Johor - the most southern state in the Malay
peninsula - has a book value of about MYR38,700 per hectare, while
IOI Corp's (1961.MY) land bank, which is located directly opposite,
was recently revalued to MYR1 million per hectare.
Currently trading around MYR11 a share, Genting trades at around
2.2 times book value and about 21 times projected earnings. Tan
notes the stock is the cheapest among Malaysia's big cap plantation
stocks and has a target price of MYR12.
As crowds pack malls for the mandatory Black Friday shopping
trip after polishing off the last few slices of pumpkin pie,
perhaps a better thing to do would be to shop for South East Asian
palm oil stocks.
---
Email: isabella.zhong@barrons.com
---
Comments? E-mail us at asiaeditors@barrons.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires