Plantation counters a long-term investment

The downside for CPO is limited, but there isn’t much in the way of catalysts for the sector either, according to expert


THE near-term outlook on plantation counters continues to hover in the neutral zone with limited downside risks, after the first half of 2019 (1H19) was marred by high stockpiles and an overall bearish sentiment towards commodities due to a re-escalation of US-China trade tensions and the African swine fever outbreak in China.

With some five million people involved in the entire value chain of the industry, the low crude palm oil (CPO) prices have a significant impact on consumer spending and the wider economy.

Due to bearish demand-supply fundamentals of the edible oils market, analysts are advising a long-term view on Bursa Malaysia-listed palm oil companies, as slowing output growth should boost the sector over the next one to two years, while selected planters affected by operational issues continue to work towards management and financial improvements.

“The downside for CPO is limited, but there isn’t much in the way of catalysts for the sector either. At current levels, CPO prices are unlikely to drop much further, nor bounce much higher — unless the weather turns and stockpiles drop,” Rakuten Trade Sdn Bhd research VP Vincent Lau told The Malaysian Reserve.

He said a longer-term position would be more advisable for CPO counters, with hopes for a possible recovery at troubled planter FGV Holdings Bhd.

International rating agency Fitch Ratings Inc last week stated some palm oil producers face increased risks in their credit profiles after sustained weak performance in the first quarter (1Q).

CPO prices fell 22% year-on-year in the 1Q and hit earnings of planters with lower upstream productivity and lack of downstream operations.

Lau said PPB Group Bhd remains a stable choice, given its steady track record, while Sime Darby Plantation Bhd, in a move to improve its cashflow, last week disposed of its loss-making Indonesian unit.

Sime Darby Plantation is also expected to decide soon on whether or not to sell its loss-making operations in Liberia.

Shares of both FGV and IOI Corp Bhd closed unchanged at RM1.14 and RM4.24 respectively yesterday, while

Sime Darby Plantation fell 1.22% to RM4.84.

TH Plantations Bhd plunged 4.67% to 51 sen and Kuala Lumpur Kepong Bhd (KLK) slipped 0.57% to RM24.44. PPB Group dipped 0.22% to RM18.56.

Malaysian CPO futures rose yesterday to RM1,967 a tonne for the benchmark contract, despite sector production having registered a surprise increase and export numbers from top global palm oil producers showing weakness.

CPO futures contracts are trading near seven-month lows following a jump in soy complex futures after the US last Friday said it sold 544,000 tonnes of its soybeans to China, ahead of a meeting between US and Chinese presidents Donald Trump and Xi Jinping on Saturday.

Exports of Malaysian palm oil products also slid 19.9% to 1.34 million tonnes in June from 1.68 million tonnes in May, according to data compiled by cargo surveyor Intertek Testing Services (M) Sdn Bhd.

On a month-on-month basis, the country’s exports in June were down 19.6%, inspection firm AmSpec Agri Malaysia said.

Maybank Investment Bank Bhd (Maybank IB) last week cut its estimated CPO average selling price (ASP) for 2019 to 2021 to RM2,100/RM2,300/ RM2,400 per metric tonne, down by 6% to 11% on weaker than expected spot CPO ASP in the first six months of 2019.

“Much of the negatives have been priced in, in our view, and the slowdown in palm oil output growth should trigger improved CPO prices in the next 12-18 months.

“Our 12-month neutral view on the sector is unchanged as the Malaysian large-caps have largely priced in a CPO price recovery. But long funds should consider taking the opportunity to accumulate bombed out small- and mid-caps during this downcycle,” the research firm said.

It expects firmer CPO prices in 2H19 and 2020, as the recent low prices have stimulated demand — which in turn has resulted in a drawdown of stockpiles in the first five months of this year as exports outpaced production growth.

Separately, the research house said it is keeping its ‘Hold’ calls on IOI Corp, KLK, TH Plantations and Sime Darby Plantation, given that catalysts are lacking in the market.

Positives for IOI Corp include a defensive integrated business model, plus a low-cost upstream division, while KLK has the benefit of a diversified business model with earnings contributions from oleo-chemicals and property development.

TH Plantations is expected to post core losses over the next three years up to 2021 due to its relatively high operating cost of production, although Maybank IB said the group’s share price downside is limited as it now trades at 0.6 times its price-to-book ratio.

Sime Darby Plantation plans to monetise some of its landbank and raise about RM1 billion this year to help weather the lull in CPO prices.

FGV, meanwhile, is facing resistance from shareholders — like the Federal Land Development Authority which holds a 33.7% stake — who voted against a remuneration package for FGV’s directors due to its poor financial performance.