20140115-Maybank_KERPL-Commodity_Traders_30页_990kb

Commodity Traders Summary

Core Content

This report analyzes the commodity trading sector in 2014, highlighting the key trends and stock selection criteria that are expected to influence performance. The overall outlook is Neutral, due to the combination of slowing demand from China, a stronger USD, and a liquidity squeeze.

Main Trends

Trend #1: Hard vs Soft Commodities

• China's economic rebalancing is expected to reduce demand for hard commodities (e.g., coal, iron ore) and increase demand for soft commodities (e.g., grains, sugar, edible oil).
• Hard commodities are more vulnerable to economic changes, while soft commodities are seen as more resilient due to their role as basic necessities.
• Soft commodities are expected to benefit from a growing population and increased biofuel demand.

Trend #2: Prices to Remain Under Pressure

• Commodity prices are likely to stay under pressure due to weak global demand and the appreciation of the USD after the Fed's QE tapering.
• Upstream players (mining, plantations) may suffer from lower prices and reduced margins, while midstream and downstream traders are more likely to benefit.
• Global supply surplus is anticipated for many key commodities, including coal, iron ore, copper, and agri-commodities like sugar and cotton.

Trend #3: Liquidity Squeeze and Rising Interest Rates

• QE tapering is expected to reduce global liquidity and increase the cost of debt, putting pressure on companies with high leverage.
• Stronger balance sheets and better liquidity management are key advantages in this environment.
• Wilmar has the lowest cost of debt (around 2-3%) and a strong balance sheet, making it the least vulnerable to liquidity constraints.

Key Stock Picks

Wilmar

• Rating: BUY
• Target Price: SGD4.30
• Reasons for Recommendation:
  • Exposure to basic food products such as edible oil, sugar, and wheat.
  • Midstream processor position, which is less exposed to upstream volatility.
  • Strongest balance sheet and lowest cost of debt among the three.
  • Likely to benefit from biodiesel demand growth in Indonesia.

Noble

• Rating: HOLD
• Target Price: SGD1.07
• Reasons for Recommendation:
  • Strongest balance sheet and liquidity management.
  • Agricultural division (especially sugar) is expected to improve in 2014.
  • However, high exposure to hard commodities (coal, iron ore) makes it vulnerable to China's economic rebalancing.

Olam

• Rating: HOLD
• Target Price: SGD1.57
• Reasons for Recommendation:
  • Diversified exposure to a wide range of agri-commodities.
  • High gearing level (1.9x) and cost of debt (7%) make it more susceptible to liquidity and interest rate risks.
  • Cutting capex may limit growth for the next few years.

Stock Selection Criteria

• Preference for soft commodities over hard ones.
• Preference for mid-to-downstream players over upstream ones.
• Stronger balance sheets and better liquidity management are prioritized.
• Clear catalysts and lower likelihood of earnings miss are key factors.

Key Figures and Comparisons

Summary

The commodity trading sector is expected to face challenges in 2014 due to slowing demand from China, USD appreciation, and liquidity constraints. Companies with less exposure to hard commodities, stronger balance sheets, and lower cost of debt are likely to perform better. Wilmar is highlighted as the top pick due to its strong financial position, focus on soft commodities, and potential benefits from biodiesel demand. Noble and Olam are rated HOLD due to their higher exposure to hard commodities and higher leverage, respectively. The report underscores the importance of earnings visibility over growth potential in this uncertain environment.