Commodity Traders

Kim Eng on 18 Jan 2013

2013 to be a whole new ballgame. After a lacklustre year in 2012 during which commodity trading companies suffered both de-ratings and earnings decline, we expect 2013 to herald a healthy rebound. Indeed, expectations have swung so far in the course of one year that our earlier pessimism about earnings has started to fade and we deem further earnings disappointments highly unlikely. While profit growth may not return to its earlier pace, it will still be healthy.

Signs of pick-up in key product markets. These traders are involved in a myriad of products and we detect signs of a pick-up in several key product markets in which they are involved, such as sugar, coal, palm oil and cotton. This is predicated on a recovery in China, which remains the driver of incremental demand.
Strengthening balance sheets is a positive. Managements appear to be favouring a slowdown in capex spending. Noble, for example, would likely receive more cash from asset recycling than new capex investments in 2012 and Wilmar has also guided for lower capex than profit going forward. Olam may consider recalibrating its strategy in the light of the Muddy Waters episode. As a result, we expect to see strengthening balance sheets going forward.

Tactically bullish on cyclical lows. In the longer-term picture, these suppliers will still play a relevant role controlling commodity flow into Asia. We believe it will be profitable to take an early position in selected names. Excluding the GFC period, valuations are at historical lows while the premium over global peers which they have previously commanded has dissipated.

BUY Noble and Wilmar, SELL Olam. Our preferred stock in this sector is Noble (NOBL SP, BUY, TP SGD1.60), which we believe is most leveraged to an improvement in economic activity in China and has the most robust balance sheet. We also upgrade Wilmar to a BUY (TP SGD4.65) expecting them to show their strength of scale in the current lacklustre CPO price environment and ongoing tax regime changes. We maintain Olam as a SELL, with a lower TP of SGD1.30. We see significant risk from its version of a capex cliff and deem consensus earnings too optimistic, with further downside on higher debt costs not factored in.