2014 looks set to be a year of transformation for commodity traders, with demand from China slowing and a stronger USD coming into play. Maintain Neutral.
The winners could be companies with little or no exposure to hard commodities, fewer upstream plantations or mining operations, stronger balance sheets and lower cost of debt.
Wilmar fits the profile and is our top pick in the sector. Reiterate BUY and TP of SGD4.30.
Changing global landscape, maintain Neutral
The world’s two largest economies are in the midst of change. China is making efforts to rebalance its economic growth model, while in the US, the Federal Reserve is tapering its quantitative easing programme. In our view, these two events could significantly transform the supply and demand dynamics of the commodity trading industry in 2014 and perhaps reshape its global landscape. We also expect commodity prices to remain under pressure on sluggish demand and rising USD. We therefore reiterate our Neutral stance on the sector and recommend companies that stand to benefit from new developments and have better earnings visibility and stronger balance sheets. Wilmar is our top pick, rated BUY (TP SGD4.30), while Noble (TP SGD1.07) and Olam (TP SGD1.57) are both rated HOLD.
Stock selection criteria
Against a fluid and changing backdrop, we value earnings visibility above growth outlook. Given the bigger cloud of uncertainty overhanging the industry this year, companies with little or no exposure to hard commodities, fewer upstream plantations or mining operations, stronger balance sheets and lower cost of debt could emerge as winners. Simply put, we prefer companies with clear catalysts and less likelihood of an earnings miss.
We prefer Wilmar to either Noble or Olam because of its superior earnings visibility and clear catalysts. Moreover, its balance sheet is strong and its cost of debt, the lowest among the trio, making it the least vulnerable to a shrinking global liquidity and rising cost of debt.
Publish date: 16/01/14