CPO price jumps to a fresh 3-year high at RM3,125 a tonne on positive demand-supply fundamentals

by SHAHEERA AZNAM SHAH / pic by MUHD AMIN NAHARUL

INVESTORS are bullish that fundamentals will sustain price rally in crude palm oil (CPO) and translate to better earnings for plantation stocks and an upgrade of the sector.

The CPO price hiked to a fresh three-year high at RM3,125 a tonne for the benchmark futures contract on Bursa Malaysia Derivative Exchange yesterday on positive demand-supply fundamentals.

Kenanga Research analyst Adrian Kok upgraded the plantation sector to ‘Overweight’ as the sector is expected to record better performance due to the anticipated earnings boost from the price rally.

The brokerage upgraded the plantation sector to ‘Overweight’ with a higher calendar year 2020 CPO price target of RM2,700 per tonne.

“We believe the worst is over for the plantation sector as the demand-supply dynamics for CPO is in favour for price upside due to tight supply, arising from production decline, as well as growing demand from biodiesel,” Kok stated in a research report.

He added that planters are expected to register significant sequential earnings improvement due to stronger CPO prices after the recent earnings disappointments.

Kok opined the CPO inventory levels are expected to decline further this year due to the cyclical dry weather conditions and the insufficient application of fertilisers.

“Dry weather impact on CPO production typically lags by six to 12 months. Recall that Malaysia and Indonesia experienced dry weather from June to early October 2019.

“Alongside lower application of fertiliser and a slowdown in new plantings to manage costs during the depressed CPO price environment in 2018 to mid-2019, we expect the production decline to continue into 2020,” he said.

On the export front, Kok said demand from India will likely increase in the months ahead in line with the reduced export tax on crude and refined palm oil by the Indian government.

“The demand from India is expected to pick up following its recent move to reduce import taxes on crude, from 40% to 37.5%, and refined palm oil, from 50% to 45%, from Asean countries.

“Overall, we continue to expect demand to outstrip supply in the first quarter this year, leading to depleting stockpiles, likely reaching 1.8 million to 2.1 million tonne level, which should sustain CPO prices,” he said.

Kuala Lumpur Kepong Bhd’s (KLK) shares rose 1.2% or 30 sen to RM25.10 yesterday despite its trading volume was 22% below the 20-day average.

The stock has advanced 4.2% in the past 52 weeks, 1.2% in the past five days and 5.7% in the past 30 days.

The analysts’ consensus one-year price for KLK is RM25.26, for a potential return of 0.6%, while analysts have raised KLK’s target price by 12% in the past three months.

Since the beginning of the CPO price rally, KLK’s share price has increased 8.2% from RM23.18 on Oct 1, 2019.

IOI Corp Bhd rose four sen to RM4.65, while Sime Darby Plantations Bhd rose five sen to RM5.50.

Chin Teck Plantations Bhd’s shares rose 5.2% or 35 sen yesterday to RM7.10, the biggest change in 16 weeks.

Its trading volume was 73% above the 20-day average. The stock has advanced 8.2% in the past 52 weeks, 9.1% in the past five days and 9.1% in the past 30 days.

Chin Teck’s share price has increased 14.7% since Oct 1, 2019.