HLIB maintains ‘Neutral’ on plantation sector

by S BIRRUNTHA / pic by BLOOMBERG

HONG Leong Investment Bank Bhd (HLIB Research) has maintained its ‘Neutral’ call on the plantation sector, as it believes the current high crude palm oil (CPO) price will not sustain over the longer term.

The research house keeps its CPO price assumption of RM2,700 per metric tonne (MT) for 2020 to 2022, with the anticipation that CPO price will likely soften from the second quarter of 2021 (2Q21) onwards due to better supply of major edible oils.

Its top picks for the sector are Hap Seng Plantations Holdings Bhd, with a ‘Buy’ call and target price (TP) of RM2.17, IJM Plantations Bhd (Buy; TP: RM2.29) and TSH Resources Bhd (Buy; TP RM1.35).

It has a ‘Hold’ call on five other counters namely CB Industrial Product Holding Bhd (TP: RM1.09), FGV Holdings Bhd (TP: RM1.39), Genting Plantations Bhd (TP: RM10.14), IOI Corp Bhd (TP: RM4.80) and Sime Darby Plantation Bhd (TP: RM5.20).

HLIB Research analyst Chye Wen Fei in a recent note said of the eight companies, which reported their quarterly results in February, six exceeded the research house’s expectations, while the remaining two came in within expectations.

The six companies which performed above expectations were Hap Seng Plantations, IJM Plantations, Kuala Lumpur Kepong Bhd (KLK), Sime Darby Plantation, FGV and TSH Resources, while IOI and Genting Plantations came in within expectations.

“We note the 27% quarter-on-quarter (QoQ) decline in FGV’s core earnings in 4Q20 was due mainly to lower fresh fruit bunch (FFB) output, but partly mitigated by higher palm product prices, turnaround at its sugar segment and lower net finance cost.

“As for Hap Seng Plantations, the decline in 4Q20 core earnings was due mainly to the absence of investment tax allowance and lower sales volume, but partly mitigated by higher palm product prices,” he added.

Chye said on a QoQ basis, companies with higher operation exposure in Malaysia, particularly FGV, IOI and Sime Darby Plantation, clocked in lower FFB output in 4Q20, due mainly to labour shortfall as entry of foreign labour into the country was restricted as a result of the Covid-19 pandemic.

Moving forward, Chye believes labour shortage issues in Malaysia will persist into the first half of 2021, and this will continue to drag planters with higher upstream operation exposure in Malaysia.

During the quarter, she said most integrated players under HLIB’s coverage (namely IOI, KLK and Sime Darby Plantation) saw their downstream margins improving on a QoQ basis mainly attributed to improving demand sentiment for downstream products, particularly, in European markets.

Genting Plantations, on the other hand, saw its downstream earnings contracting further in 4Q20 on a QoQ basis, due mainly to weak demand for biodiesel products.