Plantations - Mistry’s take on the CPO sector
Recommendation: Neutral
We attended a presentation by Mr Mistry and concur with his view that palm oil companies are good long-term investments, and established well-managed palm oil players will be able to offer strong cashflows and good dividend yields to long-term investors. We are also seeing listed palm oil players attempting to move to a more integrated business model (similar to Wilmar) that is recommended by Mistry. However, we feel that this will take time and strong execution capability for planters to develop and achieve. We have Hold ratings on both of his picks, Wilmar and Sime Darby, as we see limited near-term catalysts and some macro headwinds affecting the businesses in the short term. We maintain our Neutral rating on the plantation sector.
What Happened
We attended Dorab Mistry’s presentation on the palm oil sector on Thursday. It was organised by Bursa Malaysia. Mr. Mistry is a highly regarded and sought-after analyst on price behaviour of vegetable oils in the conference circuits. During the session, he shared his views and thoughts on the palm oil industry. Below are the main takeaways: (1) he likes palm oil companies as they offer strong free cashflows, which allow them to pay good dividends; (2) he feels now is a good time to invest in palm oil companies for investors with 2-3 years investment horizon, as valuations have become more attractive and investors who buy into the companies today will be able to benefit from the CPO price uptick in the medium term; (3) he is of the opinion that there are far too many listed plantation companies on Bursa and encourages M&A to consolidate the players into more integrated, efficient and investible companies; (4) he likes Wilmar because it has a solid integrated business model which will help to reduce earnings volatility caused by commodity prices; (5) he predicts that there will be two national champions in Malaysia and four or five in Indonesia in the palm oil sector 20 years from now.
What We Think
We agree with his assessment that plantation companies offer good long-term prospects and established palm oil players offer good dividend yields. We feel the dividend yield factor may be one of the reasons why large Malaysian planters are able to trade at higher P/E valuations compared to their regional peers, which experience higher share price volatility as they do not enjoy price support from their dividend yields. We also find that most large palm oil players are attempting to build a more integrated business palm oil model to improve the value-add of their palm products. This is reflected in the higher capex spending in the downstream sector. However, this has led to overcapacity in the downstream activities of the palm oil business, eroding profitability in some parts of the business. We believe over time there will be consolidation in the downstream space and the fittest and most cost-efficient players will prevail. In terms of his call for more M&A activities in the sector, we are of the view that some consolidation is already playing out in the industry as evidenced by the acquisition of smaller players like Unico-Desa Plantations by IOI Corp, Pontian United Plantations and Asian Plantations by Felda Global Ventures and New Britain Palm Oil by Sime Darby over the past two years.
What You Should Do
We maintain our Neutral rating on the sector. We have Hold ratings on Mistry’s long-term picks, namely Wilmar and Sime Darby as our recommendations are based on shorter-term horizon. We also feel that both stocks lack near-term catalysts at this moment.
Source: CIMB Daybreak - 06 March 2015
Recommendation: Neutral
We attended a presentation by Mr Mistry and concur with his view that palm oil companies are good long-term investments, and established well-managed palm oil players will be able to offer strong cashflows and good dividend yields to long-term investors. We are also seeing listed palm oil players attempting to move to a more integrated business model (similar to Wilmar) that is recommended by Mistry. However, we feel that this will take time and strong execution capability for planters to develop and achieve. We have Hold ratings on both of his picks, Wilmar and Sime Darby, as we see limited near-term catalysts and some macro headwinds affecting the businesses in the short term. We maintain our Neutral rating on the plantation sector.
What Happened
We attended Dorab Mistry’s presentation on the palm oil sector on Thursday. It was organised by Bursa Malaysia. Mr. Mistry is a highly regarded and sought-after analyst on price behaviour of vegetable oils in the conference circuits. During the session, he shared his views and thoughts on the palm oil industry. Below are the main takeaways: (1) he likes palm oil companies as they offer strong free cashflows, which allow them to pay good dividends; (2) he feels now is a good time to invest in palm oil companies for investors with 2-3 years investment horizon, as valuations have become more attractive and investors who buy into the companies today will be able to benefit from the CPO price uptick in the medium term; (3) he is of the opinion that there are far too many listed plantation companies on Bursa and encourages M&A to consolidate the players into more integrated, efficient and investible companies; (4) he likes Wilmar because it has a solid integrated business model which will help to reduce earnings volatility caused by commodity prices; (5) he predicts that there will be two national champions in Malaysia and four or five in Indonesia in the palm oil sector 20 years from now.
What We Think
We agree with his assessment that plantation companies offer good long-term prospects and established palm oil players offer good dividend yields. We feel the dividend yield factor may be one of the reasons why large Malaysian planters are able to trade at higher P/E valuations compared to their regional peers, which experience higher share price volatility as they do not enjoy price support from their dividend yields. We also find that most large palm oil players are attempting to build a more integrated business palm oil model to improve the value-add of their palm products. This is reflected in the higher capex spending in the downstream sector. However, this has led to overcapacity in the downstream activities of the palm oil business, eroding profitability in some parts of the business. We believe over time there will be consolidation in the downstream space and the fittest and most cost-efficient players will prevail. In terms of his call for more M&A activities in the sector, we are of the view that some consolidation is already playing out in the industry as evidenced by the acquisition of smaller players like Unico-Desa Plantations by IOI Corp, Pontian United Plantations and Asian Plantations by Felda Global Ventures and New Britain Palm Oil by Sime Darby over the past two years.
What You Should Do
We maintain our Neutral rating on the sector. We have Hold ratings on Mistry’s long-term picks, namely Wilmar and Sime Darby as our recommendations are based on shorter-term horizon. We also feel that both stocks lack near-term catalysts at this moment.
Source: CIMB Daybreak - 06 March 2015
