“EXPECT good 4Q CY2021 and 1Q CY2022 results but with crude palm oil (CPO) prices already softening, we sense caution among investors,” penned Kenanga Research’s head Koh Huat Soon in a plantation sector update.
“An understandable sentiment amid expectation of a commodity price down-cycle, hence our “neutral” stance on the sector.”
Nonetheless, Kenanga Research expects the plantation sector to reward investors with higher dividends as well as pare down borrowing or both, thanks to stronger cash flows. “Above all else, what would be even more appealing is a sensible expansion plan,’ asserted the research house.
Very broadly, the plantation sector performed poorly in CY2021 despite strong CPO prices and earnings upgrades following two strong quarters of earnings that surpassed expectations.
“Attributing this disconnect to the sector’s generally poor ESG (environment, social and governance) credentials and the consensus view that CPO prices have peaked and likely to decline in 2H CY2022, we maintain a “neutral” call on the sector,” noted Kenanga Research.
Although CPO prices may have started easing from the October peak prices on expectations of supply uptrend from palm oil, soya bean oil and rapeseed oil in CY2022 as well as efforts to ease the entry of migrant workers to address labour bottlenecks, current inventory levels remain tight while improvements have been gradual, according to the research house.
“Hence, until the stronger projected output in CY2022 is able to eventually lift inventory levels, price downside for CPO may be limited until 2Q CY2022 and possibly beyond that,” suggested Kenanga Research. “Overall, we are expecting CPO price of RM3,500/metric tonne for CY2022.”
Kenanga Research’s top large cap pick for the plantation sector is Kuala Lumpur Kepong Bhd (“outperform”; target price: RM26.50) which has just expanded its effective planted area by 35% after buying 95% of IJM Plantations Bhd and 60% of PT Pinang Witmas Sejati.
“(It’s) net gearing is set to exceed 50% but should dip below 50% by FY2022, thanks to strong CPO prices,” projected the research house.
“(The) management is experienced with good track record. Its plantations are geographically diversified between Indonesia and Malaysia, thus reducing exposure to any continuing labour issues in Malaysia.”
For trade-oriented nimble investors who wish to capture the near-term earnings upside from still elevated CPO prices, Kenanga Research’s top small cap pick which is Shariah-compliant is Hap Seng Plantations Holdings Bhd.
“It is a pure upstream planter with net cash that yields an attractive dividend yield of 5%,” added the research house. – Dec 30, 2021
