Plantation companies to enjoy good near-term earnings prospects

This is due to the CPO price that is expected to remain at elevated levels in the near-term and to trend down more noticeably in 2022

by NUR HAZIQAH A MALEK / Pic by BLOOMBERG

THE oil palm plantation sector, which is enjoying higher prices on crude palm oil (CPO), looks set to re-rated higher due to its palatable valuations and good near-term earnings prospects.

Hong Leong Investment Bank Bhd (HLIB) analyst Chye Wen Fei said CPO price is expected to remain at elevated levels in the near-term and to trend down more noticeably in 2022 on the back of better vegetable oil supply prospects amid the fresh demand catalyst absence in the next year.

“We raise our CPO price assumptions in 2021 to 2022 to RM3,800/metric tonne (MT) and RM2,900/MT.

“Post revisions in earnings which are largely to reflect the upward revision in our CPO price and output assumptions and target prices (TP), ratings for all plantation stocks remain unchanged,” she stated in a note yesterday.

Chye expects the near-term CPO price elevation until end of 2021 supported by the tight inventory level of major vegetable oil arising from weak output and the onset of La Nina which will curb soybean output in South America.

Beyond 2022, better vegetable oil supply prospects namely soybean and palm oil amid the absence of fresh demand catalyst will likely result in weaker CPO price in 2022, she opined.

“For palm oil, we believe Malaysia’s vaccination target of 80% of the population by end of October 2021 will see reopening of more economic and social sectors, which will provide a glimmer of hope in easing the labour shortfall issue in Malaysia, hence resulting in a recovery in palm oil output in Malaysia,” she said.

Despite the downward revision in soybean output estimates in the US, HLIB noted that the revised estimate of 4.34 billion bushels is still 5% higher than 4.14 billion bushels of soybean produced in 2020 to 2021.

Chye has raised the CPO price assumption for 2021 by RM600/MT to RM3,800/MT to reflect the strong CPO price registered year-to-date (YTD) of RM4,211/MT, and supply tightness in major vegetable oils, which will likely persist into the next few months.

“We raise our CPO price assumption for 2022 by RM100/MT to RM2,900/MT, as we anticipate supply and stock level of vegetable oil to gradually return to normalcy by then. “CPO price assumption for 2023, on the other hand, remains unchanged at RM2,800/MT,” she stated.

She added that the TP on plantation companies under HLIB’s coverage has been revised by negative 5.1% to 5.6% to reflect the upward revision in its earnings forecast and a downward revision in price-to-earningsratio multiple for the sector.

“This is to reflect the ongoing environmental, social and governance (ESG) concerns on the sector,” she said.

In the note, she stated that despite recent recovery in share prices, the share price performance of plantation companies still lags behind the price rally in CPO due to lingering ESG concerns within the sector and doubts on sustainability of CPO price.

“We believe the concerns on ESG issues have already been reflected in the sector’s valuations, as most players particularly, larger-sized players, which have been in the limelight amid ESG issues, have been putting efforts in rectifying these ESG issues, and foreign shareholdings are at multi-year low level,” she said.

Ratings, however, remain unchanged for individual stocks.

Chye’s top picks are IOI Corp Bhd, rated ‘Buy’ with a TP of RM4.44, Kuala Lumpur Kepong Bhd rated ‘Buy’ with a TP of RM25.33, followed by Sime Darby Plantation Bhd rated ‘Buy’ with a TP of RM4.99 and TSH Resources Bhd rated ‘Buy’ with a TP of RM1.31.

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