HONG Leong Investment Bank (HLIB) Research has reiterated its “overweight” stance on prospects of Malaysia’s plantation sector albeit crude palm oil (CPO) prices have fallen by circa 35% from their peak of RM8,074/metric tonne (MT) in early March to averaging at circa RM6,300/MT in 1H 2022.
While Indonesia’s move to flush out palm oil inventories will likely suppress near term CPO price, the research house deemed the recent severe CPO price decline as “overdone” in view of (i) supply prospects of major vegetable oil remains uncertain; and (ii) availability of several positive demand catalysts.
From a supply standpoint, there are still uncertainties to major vegetable output recovery, namely:
- Migrant labour arrival to the Malaysian shores and higher fertiliser prices which may derail output recovery for palm oil;
- Possible return of La Niña (for third year in a row), hence lower-than-expected soybean planted acreage in US; and
- Stockpile in Indonesia will likely start normalising by end-July (depending on the pace of shipments).
“While the high palm oil prices previously have resulted in demand destruction (evidenced by reduced export demand from key importing countries), there are several factors to reinforce demand for palm oil, hence lending support to CPO price (especially when palm oil stockpile in Indonesia normalises),” justified analyst Chye Wen Fei in a plantation sector update.
These include (i) palm oil’s widened discount to soybean oil (at US$400/MT at the time of writing); (ii) low vegetable oil inventory levels among key importing countries; and (iii) more favourable POGO (palm oil-gasoil) spread which will underpin demand for palm oil if the spread sustains over the slightly longer term.
Moving forward, HLIB Research reiterated its 2022-2023 CPO price assumptions at RM5,500/MT and RM4,500/MT but lower that of 2024 to RM3,800/MT (from RM4,500/MT previously) as it anticipates supply prospects to continue improving into 2024 (which will in turn be a drag to CPO price).
“Following the downward revision in our 2024 CPO price assumption, we lower our FY2024 earnings forecasts for plantation companies under our coverage,” noted the research house. “Post earnings revision and roll-forward of valuation base year from CY2023 to CY2024, we lower our target prices on plantation stocks under our coverage by 5.9-33.1%.”
Consequently, HLIB Research downgraded its ratings on FGV Holdings Bhd and Sime Darby Plantation Bhd to “hold” (from “buy” earlier) while ratings on other stocks remain unchanged.
For exposure, the research house prefers integrated players such as Kuala Lumpur Kepong Bhd (“buy”; TP: RM26.54) and IOI Corp Bhd (“buy”; TP: RM4.36) over purer upstream players as earnings of integrated players tend to be better insulated amid volatile palm product price trend. – July 12, 2022
