Plantation stocks trading at ‘sizeable’ upside after haze-induced sell-off: OCBC

[SINGAPORE] Bumitama Agri is OCBC Group Research’s preferred pick among Singapore-listed palm oil plantation players, which are trading at a “sizeable” potential upside following a sell-off caused by the transboundary haze from Indonesia.

In a research note on Oct 21, the brokerage set a fair value of S$2.40 for Bumitama, representing a 39 per cent upside from its closing price on Oct 20.

It also set a fair value of S$0.31 for Golden Agri Resources and S$3.97 for Wilmar International , representing a potential 15 per cent and 17 per cent upside respectively, based on their Oct 20 closing prices.

The three counters, which are under OCBC Research’s coverage, are among the locally listed plantation companies whose share prices have fallen by as much as 21.7 per cent since Sep 1, in the wake of forest fires in Indonesia.

Despite the sell-off, equity research analyst Ada Lim believes the underlying fundamentals of the plantation stocks under OCBC’s coverage remain intact.

Biofuel blending programmes continue to support palm oil demand amid elevated crude oil prices, while weather-related risks are likely to temper production growth in 2027.

“Against this backdrop, palm oil prices are likely to remain well supported,” said Lim. 

Among the three counters, Bumitama “stands to benefit more from higher palm oil prices” than vertically integrated players such as Golden Agri and Wilmar International, Lim said. The latter two stand to see their top-line gains eroded by higher input costs.

In addition, Bumitama is “relatively insulated” from export-related risks given that it sources 100 per cent of its revenues domestically, she noted.

Risks to persist

Despite the supportive outlook for palm oil prices, “regulatory and reputational overhang” continue to weigh on the sector. OCBC has therefore maintained its “hold” rating on the three plantation stocks.

“We would like to caution investors against bottom fishing as it is unclear how long the regulatory overhang will persist,” said Lim, noting that there is an “elevated risk of probes” by Singaporean and Indonesian authorities over the potential illegal land clearing tactics.

The two countries on Tuesday (Oct 27) announced the formation of a joint task force to pursue companies linked to forest and land fires in Indonesia, with cooperation spanning financial intelligence, cross-border evidence gathering and potential asset recovery.

The Singapore Exchange has queried listed companies with plantation operations in Indonesia about the fires, while the National Environment Agency has issued preventive notices under the Transboundary Haze Pollution Act to 10 companies purportedly involved in the fires.

“Given the ongoing, sustained enforcement push, we also do not rule out longer term implications such as a higher cost of funding, with banks potentially curbing the financing of firms linked to regional land-clearing and haze,” said Lim.

Share price under pressure

Lim noted that it is “unclear how long share prices will remain under pressure”, adding that history “does not provide much guidance in this regard”.

During the 2015 haze crisis, share prices of SGX-listed plantation companies corrected sharply in late July before recovering in late September. That year, Bumitama and Golden Agri fell 31.9 per cent and 26.1 per cent, respectively, while Wilmar slipped 9.5 per cent. First Resources rose 3.2 per cent.

“However, the decline was also attributed to softer earnings during the reporting season, due to downward pressure on palm oil prices,” Lim noted.

A separate 2017 study by researchers from the National University of Singapore posited that share prices of Singapore-listed plantation stocks tended to rise during periods of severe haze.

This is because investors viewed it as an indicator that companies were actively maximising their planting intensity, which would then support higher future productivity.