Major Singapore plantations, namely Wilmar International, First Resources and Bumitama Agri posted stronger than expected results for 2Q18. The main attributes for the stronger results were the higher downstream margins and higher external fruit intake. This is in contrast with their peers which experienced weaker downstream margins.
The strong performance seen in 2Q18 is expected to continue into 3Q18 as the fresh fruit bunches (FFB) yield begins to improve. Companies with downstream exposure are expected to perform better on the back of higher utilisation rate, better pricing power for refiners and higher biodiesel sales volume.
Bumitama Agri (Bumitama) announced its 2Q18 results with its net profit came in within expectations at IDR388.06 billion. This was supported by stronger FFB production contributed by better yield arising from new mature areas and higher-than-expected external fruit intake. However going forward, Bumitama should be targeting to raise the ratio for internal fruit intake.
To improve internal yields and mitigate the impact of weather disruptions, Bumitama’s management has started initiatives over the past two to three years to improve FFB yields. These initiatives include water management, breeding weevils and reusing waste to conserve soil moisture and nutrients.
As a result, 3Q18 should be stronger as the growth of the crop reaches its peak of the year. The management is expecting FFB production ratio of 44:56 for 1H18:2H18, raising the ratio for internal FFB intake. Internal intake reaps better margins due to lower operating costs involved during production process.
Analysts from UOB Kay Hian Research reiterated their “Buy” call for Bumitama Agri and gave a price target of $0.93. The stock is currently trading at $0.70, translating to a potential upside of 32.9 percent.
Wilmar International (Wilmar) saw its strongest quarterly performance in 2Q18 since 2011 as net profit jumped multifold to US$316.4 million from US$59 million a year ago. The strong performance was driven by a higher margin from its tropical oil division that was contributed by value-added downstream products and a better sales volume of oilseeds and grains manufacturing, though its sugar segment remains in red.
Owing to ongoing weakness for the commodity’s prices, its consolidated losses attributed from its subsidiary, Renuka Sugar continue to weigh on its profitability. This was due to the increased stake in Renuka Sugar which changed it from an associate to a subsidiary. However, in spite of short-term headwinds, the raise in stakes of Renuka Sugar should be viewed as a long-term strategic move which will bring greater operational synergy for Wilmar’s sugar network and trading team.
Looking forward to 3Q18, Wilmar remains positive on its outlook and expects its growth momentum from 2Q18 to continue on the back of stronger sales volumes, as well as improved margins from its tropical oils and oilseeds and grain segments.
Analysts from UOB Kay Hian Research reiterated their “Buy” call on Wilmar International with a target price of $3.90. Ex-dividend, Wilmar is currently trading at $3.17, translating to a potential upside of 23 percent.