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Broker's take: UOBKayHian sees Bumitama Agri outperforming palm oil peers

AMONG the palm oil stocks on the Singapore Exchange, Bumitama Agri is likely to outperform its peers, said UOBKayHian Research.

The brokerage is expecting Bumitama to see even higher palm oil production in the fourth quarter compared to the third quarter, and therefore deliver the highest output growth among the four companies under its coverage.

Bumitama had maintained its guidance of 25 per cent year-on-year growth for fresh fruit bunches (FFB) production for 2017, analysts Leow Huey Chuen and Ooi Mong Huey noted.

In contrast, First Resources and Golden Agri-Resources had revised their production growth guidance downwards during the recent results, from 15-20 per cent to 10-15 per cent.

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"Moreover, we understand that most of the fertiliser costs were booked in the nine months of 2017. Thus Bumitama is likely to report better quarter-on-quarer earnings in fourth quarter 2017 and outperform peers," they said in a research note on Thursday.

UOBKayHian has a "buy" recommendation on Bumitama, with a target price of S$1.03.

Most palm oil producers are expecting flat quarter-on-quarter FFB production in the fourth quarter, in contrast to earlier expectations of strong peak production. Compared to last year, FFB production is likely to be lower as recovery from the effects of El Nino is slowing, and the fourth quarter of 2016 had seen record high production.

UOBKayHian is maintaining its "market weight" call on the sector.

"We maintain our longer-term view that there will be significant CPO (crude palm oil) price weakness going into 2018, as palm oil is likely to be in oversupply by mid-2018," it said.

"Moreover, the ample soyabean supply in the market is likely to pressure soyabean prices, in turn capping palm oil prices."

It has "hold" calls for First Resources and Golden Agri as current share prices have already factored in the higher production and earnings expected for the second half of 2017, it said.

Bumitama's young tree age profile means strong production, which will partly offset the CPO price weakness going into 2018, it added.

It also has a "buy" call on Wilmar. "We are positive on Wilmar's outlook on the back of the expected strong performance from the oilseeds and grains division."