Singapore Agribusiness - Pockets of value amidst the haze


Event
• Whilst we cut our CPO price forecasts on the back of a weaker price outlook for the vegetable oil complex (especially soybean oil) we see pockets of value in the sector post weak share price evolution YTD.

Impact
We cut our CPO price forecasts by 10-13%, as shown on the left. El Nino’s potential negative impact on CPO supply has become palpable, certainly to those of us sitting in hazy Singapore. But we are mindful of an otherwise well supplied vegetable oil complex. Weak soybean oil prices are the principal drivers of our CPO price cuts.

The lower CPO price outlook is the main driver of our earnings and price target cuts for the agribusiness sector, also shown on the left. We are also wary of the potential ‘sticker shock’ arising from accounting changes from next year (IAS 16). This issue is explained further in the report.

Still, we see pockets of value emerging post weak share price performance year to date. Valuations look less demanding than they did at our last update with risk reward more skewed to the upside, based on our updated sensitivity analysis.

Our order of preference is as follows:
First Resources remains our top pick. Whilst it is less sensitive to CPO prices than upstream peers GGR and IFAR, we like the predictability of FR’s high production growth and high margin model. FR also has lower IAS 16 ‘sticker shock’ risk on earnings than GGR and IFAR.

Wilmar shares have traded off recently, opening a buying opportunity in our view. We raise our rating to Outperform from Neutral. We think the weakness has arisen due to exaggerated concerns around the future of Wilmar’s carry trade income stream. Management may decide to present more disclosure in this area, which we see as a potential catalyst. Wilmar carries the lowest IAS 16 sticker shock risk within the group.

Indofood Agri is the cheapest upstream plantation name in the group, whether on a P/BV, PER or EV / Hectare basis. This remains true pro forma for IAS 16 changes. We think IFAR’s quasi holding company structure remains an issue for some investors, and a patchy results track record has not helped the cause either. But we think current valuation discounts a lot of bad news and with a mid teens total return on offer now, we raise our rating to Outperform from Neutral.

Golden Agri remains Neutral on the back of its volatile fundamentals, presently fair valuation, and disproportionately high IAS 16 sticker shock risk (which stands to elevate its 2016 PER from the mid teens to the low twenties). Should we get more comfortable with our CPO price bull case scenario for 2016, we could turn more positive.

Outlook
Despite our earnings cuts, we are warming up to the Singapore agribusiness sector on valuation. That said, in a Singapore context, the sector’s projected 13% total return lags the 17% we expect for the FSSTI, and we would also point investors to the banks and selected property and industrial names. (This Report was published on 07 Oct 2015)

Source : Macquarie Equities Research

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