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AA-rated Tellwright: palm oil players set to boom

AA-rated Tellwright: palm oil players set to boom

The creation of new palm oil plantations is becoming increasingly difficult, which will see existing players will see strong growth, according to Waverton’s Brook Tellwright.

Speaking to Citywire Selector, Tellwright, who runs the Waverton South East Asian fund, said countries such as Indonesia and Malaysia are struggling to develop adequate competition.

The Citywire AA-rated manager referenced the 4.1% holding in palm oil production company Astra Agro Lestari as an example of a stock company could see huge demand growth in 2017.

'Astra has been on the radar for environmental campaigners, as what we have seen with the palm oil business is that there has been a lot of destruction of forestry in the past to create new palm oil plantations.

'That has become increasingly difficult in the two big countries involved in the palm oil business, Malaysia, and Indonesia. In both countries, regulations have been tightened very significantly and make it very difficult for companies, such as Astra, but also other big players in the market to bring new plantation.'

It’s this struggle, Tellwright said, which will propel big players like Astra, as the supply of land becomes more restricted in the regions able to farm palm oil.

'Demand for palm oil is still going very strong, as it’s a product that is used in manufactured food. It’s increasingly in demand across Southeast Asia, but also as an energy substitute for gasoline.

'We are seeing a situation where demand is growing quite strongly on a long-term secular basis. Supply is not really there because of the difficulties that exist in terms of constraints, in terms of plantation land.

'The existing players that have very large plantations and have been going for many years, are actually likely to see strong growth in terms of demand for their product, making pricing stronger in the next few years,' Tellwright added.

A question of patience

Tellwright currently has 17.1% of the fund allocated to financials and 4.5% allocated to the Philippine National Bank, an allocation Tellwright believes is a question of patience.

'The bank was created through the merger of PMD and Allied Bank in 2013, as a result of that, it’s now in the top ten largest banks in the Philippines. One major shareholder is Lucio Tan, who owns one of the biggest business empires in the Philippines.'

'He is going to be able to take out an enormous amount of cost from Allied Bank, which was a government-controlled bank, prior to being rescued back in 1997.'

Tellwright said the market has grown impatient with waiting to see how Lucio Tan will improve returns at the merged bank.

'As a result, I think a lot of investors have walked away from this story and it’s now a very cheap stock in my view - probably selling at a discount book value and a low PE ratio.’

'I think it’s just a question of patience, the new management will be able to deliver, they have some great assets, it’s a well-capitalised bank – but investors just don’t like it very much at the moment.’

The Waverton South East Asian fund returned 1.96% in US dollar terms, over the three years to the end of December 2016. This compares with a 6.10% fall by its Citywire-assigned benchmark, the FTSE ASEAN 40 TR USD, over the same time period.

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