22 Dec 2019 / by AP Securities (formerly Angping & Associates Securities)
FREE Special Report: DNL, AXLM to Benefit from Palm Oil Price Surge
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OUR PARTNER BROKER’S ANALYSIS AND RECOMMENDATION
Year-to-date, palm oil price has advanced by 36% this year to $685/ton and is expected to stay at elevated levels in 2020 due to Indonesia’s increased usage of biofuel and expected weaker production due to drier weather. The chief beneficiary of this is DNL and AXLM as higher raw material price is generally passed on to clients.
Benefit to DNL
Recall than in the 3rd Quarter, DNL’s revenues declined by 20% year-on-year (yoy) while AXLM’s dropped by 12% mainly due to lower commodity prices. Sustained elevated prices should support both managements’ outlook for a 2020 recovery.
The Philippines is one of the biggest consumer of plastics in the world, and at one point, Pres. Duterte has floated the idea of banning single-use plastics. Yesterday, DNL disclosed that it received certification for its biodegradable plastic products which could eventually replace single-use plastics. With packaging accounting for a major chunk of local manufacturer’s cost, this could eventually be a big business for DNL.
Consensus expects an 11% EPS growth for next year. As of yesterday’s closing price, DNL is trading at 19.8x (0.5x stdv below 6-yr mean). Given the improving outlook for the stock, we would look to accumulate near technical support at PHP 8.90/share, with potential upside to PHP 9.85/share (21x PE, in line with historical mean).
Benefit to AXLM
Another stock that we see benefitting from the palm oil surge is AXLM (Target Price: PHP 4.80/share, 11.1x P/E). Aside from increasing margins as coconut milk and water demand abroad surge, we see cost-leadership qualities (OPEX as % of sales maintained at 12% for the past seven quarters) in AXLM that will further support margin improvement.
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