ESG concerns have already been priced into plantation stock valuation

THE disconnect between share price performance of plantation stocks and crude palm oil (CPO) price due to ESG (environment, social and governance) considerations should not raise any alarm bell given such concerns would have already been factored into their share prices.

Hong Leong Investment Bank (HLIB) Research observed that most plantation players (particularly, larger sized players who have been in the limelight amidst ESG issues) have been putting efforts in rectifying the ESG issues while their foreign shareholdings are at multi-year low level.

“Despite recent recovery in share prices, share price performance of plantation companies (which is represented by KL Plantation Index) still lags behind CPO price rally due to lingering ESG concerns within the sector and doubts on sustainability of CPO price,” observed analyst Chye Wen Fei in a plantation sector update.

“While we maintain the view that current high CPO price will not sustain over the longer term, we upgrade the sector to “overweight” as we believe a re-rating is warranted on the sector’s palatable valuations and good near term earnings prospects (arising from elevated CPO prices).”

The research house’s top picks are IOI Corp Bhd (“buy”; target price: RM4.44)’ Kuala Lumpur Kepong Bhd (“buy”; target price: RM25.33), Sime Darby Plantation Bhd (“buy”; target price: RM4.99) and TSH Resources Bhd (“buy”; target price: RM1.31).

In the near-term, HLIB Research expects 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) to remain supportive of CPO price at elevated levels (possibly until end-2021).

“(However), we believe CPO price will trend down more noticeably in 2022 as we anticipate supply outlook of vegetable oils to improve in 2022,” projected the research house.

In this regard, HLIB Research raised CPO price assumptions to RM3,800/metric tonne (MT) in 2021 and RM2,900/mt in 2022.

It raises CPO price assumption for 2021 by RM600/mt to RM3,800/mt mainly to reflect (i) the strong CPO price registered YTD (year-to-date) (RM4,126/mt), and (ii) supply tightness in major vegetable oils which will likely persist into the next few months.

As for the RM100/mt rise in its CPO price assumption for 2022 to RM2,900/mt, HLIB Research noted that it anticipates 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,” added the research house. – Sept 7, 2021

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