HLIB rates ‘Underweight’ on plantation


Hong Leong Investment Bank Bhd (HLIB) has maintained its ‘Underweight’ stance on the Malaysian plantation sector driven by its pricey valuations and weak near-term outlook, arising from the current high stockpile level and absence of positive demand catalysts.

HLIB Research analyst Chye Wen Fei said the proposal by the European Union (EU) to ban palm oil is believed to be a long-drawn affair.

“At the worst case, should the proposal succeed in getting the consensus to ban palm oil, it will then be adopted as an act…this will have an adverse impact on palm oil prices in the near to medium term.

“It will be difficult for both Malaysia and Indonesia to increase exports of palm oil to other importing countries significantly within a short time span in order to fill the vacuum from the EU,” she said in a research note yesterday.

Chye said in the longer term, the impact will be less detrimental as lower palm oil prices will expand the price gap between palm oil and other vegetable oils in the market.

“Hence, boosting palm oil demand from palm oil-consuming countries outside of the EU,” she said.

Chye added that there is no change to the bank’s crude palm oil price assumptions of RM2,300 per tonne for 2019 and RM2,400 for 2020.

The sector has been in the limelight for the past few months due to the EU resolution and its proposal, which began with the signage of the Amsterdam Declaration by six EU countries in December 2015, which states that the countries declare themselves as supporters of 100% sustainable palm oil in Europe.

In 2017, the European Parliament went to vote to amend the EU Renewable Energy Directive, which did not specifically ban or restrict the use of palm-based biofuels, but applied new criteria for crops used for the production.

As such, this resulted in the capping of palm-based biofuel consumption in the EU at 2019’s level until 2023, and later, completely eliminated by 2030.

According to HLIB Research, Malaysia and Indonesia view the EU’s move as discriminatory due to the lack of scientific data and reliable information used in classifying palm oil production as a high “Indirect Land Use Change” risk biofuel feedstock.

Both Malaysia and Indonesia went on a joint mission to Brussels, Belgium, to express their concerns to the EU leaders and find a solution for all parties involved.

According to HLIB Research’s and Oil World data, Indonesia owns 56% share of world’s palm oil production, while Malaysia and other countries own 28% and 16% respectively.

The Malaysian Palm Oil Board and HLIB Research’s data also found that the EU’s share of Malaysia’s palm oil exports only consisted of 11.8% as of 2018, out of 16.5 million metric tonnes.

Among the listed plantation counters, Kuala Lumpur Kepong Bhd, Sime Darby Plantation Bhd, Genting Plantations Bhd and TSH Resources Bhd are rated as ‘Hold’.

FGV Holdings Bhd, IOI Corp Bhd, IJM Plantations Bhd, United Malacca Bhd and Hap Seng Plantations Holdings Bhd stand at ‘Sell’.

Only CB Industrial Product Holding Bhd is rated as ‘Buy’.