A soft commodity opportunity

Day trader Michael Taylor is keeping a close watch on a company benefiting from a spike in palm oil prices

March 30, 2022

Market bounce this week looks dubious
Commodities remain the place to seek opportunities
Palm oil producers riding rising CPO price

This article will be my final bi-weekly article. From now on, I’ll be writing a monthly column. This is because it’s getting harder to find quality trades. I have no wish to publish sub-quality content – many of the trades featured in this column have been profitable (although you can’t win every one) – and I’d like to write about my best ideas only. I’ll be in the first issue of every month. I do send a weekly email on trading tactics for subscribers to my website.

This week has proven eventful already. On Tuesday we saw huge sector rotation; commodity stocks such as Anglo American (AAL) and Glencore (GLEN) were down heavily, with the travel basket stocks such as airlines rising sharply. It has all the scent of a risk-on market.

But we’re not out of the woods yet. And I realise I’m at risk of becoming known as a bear, but as I wrote two weeks ago nothing is getting better anytime soon. I still believe it to be the case that we are lurching into a big economic recession.

But the bulls are making plenty of noise, and everyone is happy. Maybe I’m wrong. Or maybe the short side is where the best risk/reward trades are at. Either way, we’ll see soon enough.

My trade thesis is still long commodities and to back companies with tailwinds. I don’t see any point in buying a company that is going to suffer an increase in costs. Will people be so keen on eating out and going to the pub when other necessities such as fuel, heating, and the supermarket trips are taking so much out of their pocket? Will a family of four think twice before dropping at least £50 on tickets, popcorn, and drinks? Students certainly don’t need an excuse to save money.

For that reason, retailers and hospitality are now of little interest, unless it’s a compelling special situation.

Therefore, it may come as no surprise to you that I’ve been looking at (yet) another commodity play.

I’ve written about Dekel Agrivision (DKL) and RE Holdings (R.E.A) in the past (and now own both), and Anglo-Eastern Plantations (AEP) is another company that is geared towards the price of crude palm oil (CPO). But unlike its sector compatriots, Anglo Eastern Plantations is now clear of debt and had a net cash position of $192.2mn ($146.2mn) as at 30 September 2021. But that was six months ago, and the CPO price today is $1,730 compared with $1,310 back then – a 32 per cent increase. I believe high CPO prices are here to stay, although it is worth noting that Indonesia has increased its export tariff scale, which means a lower net price realised at these levels for the international Rotterdam price. There are also no guarantees against further increases. RE. Holdings has set out a tariff model with a scale in its recent RNS dated 29 March 2022 – it says the company will be paying an extra $200 per tonne from the total export tariffs that were payable under the previous rules.

From Anglo-Eastern’s last results, the company generated a comprehensive net income of just under $30 million. If we extrapolate this to the full year (conservative giving the price rise in CPO) we get £45.8mn – meaning the company is valued at roughly six times earnings given the current market cap of £299mn. That number decreases when you strip out the cash – a number which could, if the market cap doesn’t change, easily cover the market cap within two years should CPO prices remain elevated. I believe Anglo-Eastern Plantations is a trade that has both the technical uptrend plus the fundamental improvements with a low valuation.

Looking at Chart 1, we can see how the stock collapsed in 2018 and through 2019 until a resurgence in the third quarter of 2019. But this rally was short-lived, as we can also see that the stock got caught up in the Covid-19 crash and dropped to as low as 350p. In hindsight, we see that this was a great time to be buying lots of stocks as we saw rallies across the board in small caps, large caps, and trash stocks.

We can see the classic signs of a downtrend beginning as the stock failed to punch through into a near high around 900p. The warning signs continued when the stock sold off and started trading below the 200-day moving averages. Anyone holding onto the stock when the moving averages were pointing downwards would have found themselves in a painful predicament as the stock more than halved from peak to trough.

This is why charts will always form the basis of my trading decisions. It doesn’t matter how undervalued a stock is or how much of a great opportunity it seems, there is no point fighting the price and the entire market. Choose your battles wisely, because fighting the price is unwise unless you’re willing to accept huge volatility in your account.

Moving across to Chart 2, we can see a gentle uptrend and a big spike in volume that I’ve marked with an arrow. Since March, volumes have been elevated. I’m looking to buy the breakout of resistance around 757p. We can see the stock did break out intraday on heavy volume, but closed the session below resistance. That said, it did close up on the day and created a new recent closing high. I’m bullish on Anglo-Eastern Plantations and I have my alert set ready.