I was indeed lucky to have sold my shares in First Resources in mid July. Its share price has now fallen to 1.83. I didn’t foresee this. What could have caused this?
- CPO price has fallen from around RM 2200/t to now RM 2000-2100/t.
- Soybean oil price has fallen from around 32 cents to 30 cents/pound.
- Crude oil price has fallen from above $60/barrel to $50/barrel.
- Malaysia palm oil inventory rose by 5.3% to 2.27 million tons at end of July due to higher than expected production and lower demand. This level is considered high compared to historical average.
- Seasonally, August-October are best months for production. So, supply will increase -> price is likely to get depressed.
Current prices for CPO, soybean oil and crude oil are near the bottom of their price range over the past few years. Can they break the support level and go lower? Possible (read: that’s like no answer or simply I don’t know).
These things just line up to point to me that in near term, palm oil prospect is just not going to be good. Wait… When it was at 1.78 in early May, I recommended a BUY. Why suddenly change opinion in such a short time for someone who practice value investing? Nope, I’m not really changing my opinion. First Resources remains a good company, well-managed, and position for around 10% growth for next few years. Its first 6-month internal FFB production grew by 18% yoy. However, general market condition is beyond their control. If the commodities above maintain their support level and bounce back, then current price will turn out to be a good buy.
What’s my take? Well, before yesterday, I think they are likely to maintain their support levels. But, China’s recent devaluation of their currency complicate things. Now, the global market has a mini shake and prices are all falling down, driven more by fear and risk averse than by the actual impact of the RMB devaluation. It may be too complicated to analyse the impact of the RMB devaluation, but even if it’s not, it’s certainly not in this post to talk about it.
Given the mini shake to the global economy, fear can rule for a while, bringing all prices even lower in near term. I don’t want to predict that because it’s not predictable. So, don’t attempt.
For First Resources at current price, I’m stepping at sideline for a while because it’s reporting Q2 results in next few hours. Q1 was a bad result. Sometimes, for companies, bad news is a chain, coming one after another. I do think Q2 will be better because a) inventory built-up in Q1 could be cleared in Q2, b) Ramadan in Q2 could increase the consumption of palm oil. But, I think refinery business will continue to get depressed. Therefore, I’ll just wait for Q2 results, not participating by buying the stocks, especially when the global mini shake just started 2 days ago.
Will follow up again with Q2 results.