Wilmar International and First Resources could benefit from cost reduction due to their currency exposure in Indonesian rupiah.
The escalation of the US-China trade wars have been haunting some firms and even Singapore’s exports, with the semiconductor supercycling further winding down paired with Chinese import demand eased up.
But the trade diversion, as well as cost reduction from currency exposure seem to be the bright side of the heating trade tensions between the world’s two biggest economies, DBS Equity Research said.
“As the US is not imposing a blanket tariff on all countries, US importers who find it too expensive to source from China could switch their procurement sources to other Asian countries such as Malaysia, Thailand or Vietnam,” the research firm explained.
Meanwhile, currencies of emerging markets (EM) have also had its blows as US tariffs have fuelled trade uncertainties.
“For example, the Indonesian rupiah has weakened by 6.9% against the US dollar since the beginning June whilst Malaysia’s ringgit fell nearly 3.8% over the same period,” DBS Equity Research noted.
Despite these risks, the trade wars could somehow be beneficiary for some agri firms, including First Resources and Wilmar International. Both countries could get a lift from the 6.9% decline in the rupiah as they report their earnings in US dollars whilst their costs are noted in rupiah.
Paired with the cost reductions from currency exposure, both firms are set to witness the seasonal sweet spot for crude palm oil (CPO). DBS Equity Research noted that both CPO and sector share prices tend to peak in the month of March before bottoming out before mid-October followed by two to three months of price recovery.
In Q2, Wilmar International's stellar profit performance was backed by the oilseeds and grains and tropical oils segments.
“Seasonal factors aside, the recent move by Indonesia that requires railways and electrical generators to use B20 biofuel from 1 September could help to absorb excess stockpiles and underpin CPO prices,” DBS Equity Research commented.
They noted that the hike usually occurring from October to December coincides with the low production cycle starting in November and ahead of Christmas and the New Year when demand typically rises.
In relation, CPO stocks showed the similar seasonal patterns of an October low followed by a price recovery from November to December.
With the seasonal factors paired with the cost reduction from currency exposure DBS Equity Research believes that First Resources and Wilmar International will both fare well despite the escalating trade war tensions.
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