AFTER hitting a low of RM2,033/metric tonne (MT) a year ago, crude palm oil (CPO) spot prices made a strong comeback, soaring more than 134% to the historic level RM4,767/MT.
While this long rally has caught most industry players by surprise given current palm oil fundamentals could not warrant such price level, what caught the attention of most investors is the disparity between the CPO movement and plantation counters.
In this regard, PublicInvest Research attributed the muted price of plantation stocks to the unsustainable nature of the current high CPO prices which could weaken in the near-term.
“Despite the current bullish CPO price momentum, price correction would be inevitable once the inventory level sees a strong pick-up,” suggested analyst Chong Hoe Leong in a plantation sector update.
“We think CPO price could potentially drop below RM3,500/MT level after September when ample supplies kick in.”
Another contributing factor to the price disparity which is often cited by market analysts but often overlooked by industry players is how the rising ESG (environmental, social and governance) concerns put pressure on valuations.
“The increasing concerns over ESG has put plantation players in the spotlight due to the numerous pressure from the non-governmental organisations (NGOs),” PublicInvest Research pointed out. “This can be seen when the CPO exports of FGV (Holdings Bhd) and Sime Darby Plantation (Bhd) were banned in the US recently.”
Such adverse development has prompted the research house to reduce its price-to-earnings (PE) valuations for both companies by two times.
“Since end-2019, almost all plantation companies under our coverage have seen a decline in foreign shareholding, indicating that foreign funds are gradually shifting away from the plantation sector that has weaker ESG practices,” observed PublicInvest Research.
“This also explains why there is little cheer for the plantation counters despite the record CPO prices as the poor ESG benchmark has put off investor interests in the sector.”
Moreover, the palm oil industry is also feeling the pinch from labour shortage which emanated from border closures to contain the spread of the COVID-19 pandemic, a very pressing issue especially during the peak production season.
“We gather that the Sarawak-based plantation players were hit the hardest as they were short of as much as 30% of harvesters,” the research house pointed out. “The severe labour shortage issue has resulted in significant loss of income for the plantation players amid the strong CPO prices.”
All-in-all, although it is “neutral” on the plantation sector, PublicInvest Research has revised upward its 2021 CPO price forecast to RM3,200/MT from RM2,500/MT given the current CPO price rally.
For 2022, it only raised its CPO price forecast from RM2,500/MT to RM2,700/MT as it is of the view that the current CPO price is toppish and is poised for correction in 2H 2021.
Additionally, the research house also maintained its “outperform” rating on small-mid cap plantation companies which it deems as providing more attractive upside compared to the big cap counters.
The companies include Sarawak Plantation Bhd (target price: RM3.58), Ta Ann Holdings Bhd (target price: RM3.83) and TSH Resources Bhd (target price: RM1.46). – May 19, 2021
