THERE has been little cheer for the Malaysian plantation counters despite sustained rally in crude palm oil (CPO) prices over the past one year. While CPO prices have touched an all-time high of RM5,363/metric tonne (MT) or a year-to-date (YTD) gain of more than 42%, the FBM KLCI Plantation Index slipped 3.8%.
PublicInvest Research has attributed the key reason for the lacklustre share price performance of plantation stocks to the steep environmental, social and governance (ESG) discount attached to the plantation stock valuation.
“Despite all the efforts adopted by plantation companies, we notice environmental groups continue to attack the sector on three key areas, notably deforestation (environmental), fire and haze (environmental), and labour (social),” observed analyst Chong Hoe Leong in a sector update.
“On the positive note, we have seen continuous efforts taken by the plantation companies to improve on the traceability of palm oil supply, labour welfare and adoption of monitoring system to safeguard the plantation estates.”
Moreover, PublicInvest Research expects easing concerns on foreign worker shortage given the Plantation Industries and Commodities Ministry has recently approved 32,000 foreign plantation workers who have completed their COVID-19 vaccination to be brought into Malaysia in stages starting mid-October.
“We think the impact of the additional 32,000 foreign workers on the palm oil industry will be felt sometime towards the end of 1Q 2022, potentially resulting in better crop recovery, harvesting cycle and CPO yield,” projected the research house.
In view of the stronger-than-expected CPO price performance for the first 10 months of the year, PublicInvest Research has revised upward its 2021 CPO price forecast from RM3,200/MT to RM4,000/MT.
“For 2022, we raise our CPO price forecast from RM2,700/MT to RM3,500/MT,” noted the research house.
“We think the current CPO price momentum would be sustainable until 1Q 2022. Thereafter, CPO prices should ease as we expect production to increase given the reprieve seen on the issue with foreign worker shortage in Malaysia.”
All-in-all, PublicInvest research retained its “neutral” call on the sector as it regarded the current CPO price as “toppish”.
“We believe CPO price is likely to trend downside amid any sign of a strong build-up in inventory level,” reckoned the research house.
“We suggest investors look into small-mid cap plantation companies which provide more attractive upside compared to the big cap. Unlike the big-cap planters, there is little forward CPO sales exposure for the small-mid cap planters which suggest they should fully benefit from the current CPO price momentum.” – Nov 8, 2021
