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CPO Prices Bottoming Out? What Can You Do?
Hot Picks, Tradeable | 27 August 2013
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By: Simeon Ang
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By: Andre Lee
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Commodities have been having a rough year so far, haven’t they? From the yellow metal (gold) to agricultural commodities like coffee and wheat, the bull seems to have taken a hike while the bear has come back to be in vogue.

However, as this article title posits, there seems to be a glimmer of hope in the crude palm oil (CPO) arena. Looking at the chart below, we find that crude palm oil prices seem to have bottomed out and look to be rebounding.

Source: FactSet, chart on crude palm oil prices traded on the KLSE (RM/mt)

In fact, market analysts have been keen to point out that CPO has enjoyed two weeks of week-on-week gains. Are we seeing a potential recovery? What are the factors behind this recovery? More importantly, how can YOU, the retail investor, benefit from this?

The Ringgit And Rupiah Effect

Did you join the queues to grab some Ringgit when it hit historically low levels? The Ringgit has been weakening against the Singapore dollar and US dollar since the beginning of May (refer to chart below).

Source: FactSet, chart on the exchange rate of Ringgit per US Dollar (Blue) and Ringgit per Singapore dollar (Green)

While there could be many factors behind this (Malaysian General Elections?), the main issue here is how the weak Ringgit could in turn push up demand for CPO.

Source: FactSet, chart on the exchange rate of Rupiah per US Dollar (Blue) and Rupiah per Singapore dollar (Green)

The same could also be said for the Indonesian Rupiah. Indonesia being the largest producer of crude palm oil, could also see demand for CPO jump as its currency depreciates, thus making its products more attractive for export.

To further boost this effect, the Indonesian government announced plans to reduce oil and gas imports. The government plans to accomplish this by increasing the proportion of biodiesel in fuel from 7.5 percent to 10 percent.

While this is aimed at tackling the country’s large current account deficit, analysts feel that this policy change could also boost crude palm oil (a form of biodiesel) demand. In fact, analysts at CIMB believe that consumption of CPO will increase by about 1.26 million tonnes.

CPO Consumption Powerhouses – India And China

China, the world’s second largest economy is often seen as the giant behemoth supporting the growth of many industries. This applies to CPO prices as well.

The recent pick-up in China’s preliminary purchasing managers’ index (PMI) to 50.1 from 47.7 in July was seen as a boost to CPO prices.

An estimate from Malaysian surveyor, SGS (Malaysia) showed that CPO exports to China climbed 49 percent in the first 20 days of August from the same period in July.

According to an analyst at Phillip Futures, China is “likely to boost palm oil demand with stronger economic data”.

Crude palm oil (CPO) exports to India are also forecast to rise to a record amount for the second year running. This comes despite the drastic depreciation of the Indian Rupee. A rising population and higher disposable incomes both support the robust demand for CPO.

The Three – Wilmar, Golden Agri and Bumitama

Indeed, counters with exposure to CPO have been bearing the brunt of low CPO prices. Specifically, we were drawn to three counters. These are: 1. Wilmar International; 2. Golden-Agri Resources; and 3. Bumitama Agri.

Below is the chart comparing the returns of all three counters with the Straits Times Index. Notably, all three counters have underperformed the wider benchmark.

Source: FactSet, chart comparing the Straits Times Index (Blue) with Wilmar (Green), Golden-Agri (Red) and Bumitama (Yellow)

After parsing through all three company’s financial reports, one major theme became evident to us. Sales volume actually increased across all three counters. In fact, with the exception of Wilmar, sales revenue at Golden Agri and Bumitama increased due to the jump in sales volume.

However, CPO prices bit all three companies hard as gross margins fell as evidenced in the table below.

In terms of gross margins being hit, Golden Agri was the hardest hit. Golden Agri’s management remarked that the average international CPO price was US$795 per tonne for 1H13. This amount represented a 24.9 percent discount over the average price of CPO in 1H12. Likewise, one would find this same assertion across the other two companies.

With CPO prices seemingly taking a turn for the better, perhaps the three companies mentioned above might see better days.

If you believe CPO prices have bottomed out and turning northwards, perhaps you could look at these counters as value buys.

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This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Wilmar Int'l  3.740 -0.06 -1.58%   
Business: Co's integrated agribusiness model encompasses the entire value chain of the agricultural commodity processing biz, from origination and processing to branding, merchandising and distribution of a wide range of agricultural pdts.

Insight: May-19, 1Q19 revenue fell 6.2% to US$10.4b driven ... Read More
Golden Agri-Resources  0.245 -- --   
Business: Co is engaged in cultivating & harvesting oil palm trees, processing fresh fruit bunches (FFB) into crude palm oil (CPO) & palm kernel (PK), & refining CPO into industrial & consumer pdts.

Insight: May-19, 1Q19 revenue fell 11% due to softer crude ... Read More
Bumitama Agri  0.585 -0.020 -3.31%   
Business: Co produces and trades in crude palm oil (CPO), palm kernel (PK), and related products for refineries in Indonesia.

Insight: Feb-19, FY18 revenue increased 3.1% mainly due to ... Read More

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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