March 3, 2020/Cordros Report
In our last sector update, we had forecasted that both OKOMUOIL (TP: NGN83.27/s) and PRESCO (TP: NGN47.67/s) to deliver EPS growth of 42.0% y/y and 23.5% y/y respectively in 2020FY, underpinned by (1) volume expansions from newly matured plantations, and (2) a sharp CPO price increase, driven by shrinking CPO surplus picture. While our volume growth expectations remain intact, the coronavirus-induced decline in global commodity prices has forced a reassessment of our CPO price forecast. Given that the share prices of our coverage companies now respond swiftly to global CPO price movements, especially since the closure of the land border, there is a clear case for us to rethink our earnings estimates. In this report, we ascertain the impact of a sustained decline in prices to our forecasts.
Coronavirus is Wreaking Havoc: The outbreak of the coronavirus has resulted in global CPO prices shedding 25.3% YTD. If domestic prices were to mirror this move, our model suggests that average selling prices for both OKOMUOIL and PRESCO would decline by 19.3% y/y and 17.3% y/y, respectively.
Any More Legroom for CPO Prices to Fall? In the event of an extended period and/or a worsening of the virus outbreak, it is tough to see any respite for CPO prices going forward. For one, demand from China (8.9% of global consumption) is expected to slow as more communities are quarantined. Meanwhile, the precipitous decline in crude oil prices is another pressure point, as it has reduced the competitiveness of Bio-diesel as an alternative fuel, and thus, led to a reduction in CPO demand. Worse still, India’s (14.6% of global consumption) decision to restrict imports of refined palm oil and palm olein to support its own domestic producers is also negative for global demand, and by extension, prices.
Domestic Prices Should Follow Suit: Since domestic prices track global price movements, our key thesis is for a domestic CPO price erosion over 2020E. Based on our sensitivity analysis, and assuming our volume growth expectation is unchanged, a 15.0% y/y decline in average selling prices, could lead to slower earnings growth of +20.8% y/y for OKOMUOIL (prior estimate: +42.0% y/y) and faster decline in earnings of -18.0% y/y for PRESCO (prior estimate: -4.4% y/y). On a share price basis, these translate to valuations of NGN76.20/share and NGN47.20/share, respectively.