RHB Research has maintained its buy recommendation for four plantation companies due to the current higher crude palm oil (CPO) prices.
The research firm has revised upwards its target price for Kuala Lumpur Kepong Bhd (KLK) to RM30.10 from RM27.35 which represents a 23% upside plus a 2% yield. After factoring its revised CPO prices assumptions, it has also raised the company’s FY20-FY21 earnings by 11%-13%.
KLK’s latest share price implies a 2020 P/E of 28x, which is at an attractive discount to its peers’ of 30x-35x. CPO prices have risen sharply to above RM3,000 per tonne. RHB said it had expected a spike in CPO prices but did not anticipate the strength of the rally in CPO prices.
It believes the rally in CPO prices is due for a correction as there could be some speculative elements at play. However, it predicts prices in 1H20 to remain high at RM2,700-RM3,100 per tonne, before seasonally weakening to a range of RM2,400-RM2,700 per tonne in 2H20.
RHB Research has forecasted a CPO price RM2,600 per tonne for 2020, while leaving its 2021 estimate intact at RM2,500 per tonne. This will imply a substantial 22% yoy increase in CPO prices from 2019’s average of RM2,129 per tonne. With this, earnings of plantation companies are estimated to rerate upwards significantly, particularly as the leverage of CPO price change to earnings is much more significant than that of fresh fruit bunch (FFB) output growth.
For the companies under its coverage, every RM100 per tonne change in CPO prices impacts earnings by 4%-18% pa. It expects to start to see the impact of strong CPO prices on net profit from the 4Q19 reporting period onwards, which mainly is in February 2020. Despite the run-up in share prices, it opines that there is still upside for some stocks, as our sensitivity analysis indicates that most of our stock picks still reflect CPO prices of around RM2,400-RM2,500 per tonne.
RHB Research said a CPO deficit is imminent in 2020, as demand growth outstrips supply growth and stock/usage ratios fall below historical averages. Biodiesel, the largest demand catalyst, is still very much on the upswing in Indonesia and Malaysia and food demand should remain strong, from China and India. It adds that KLK’s 60%-65% exposure to upstream operations will be useful in a CPO price upcycle.
RHB Research has also revised its target price for Sarawak Oil Palms Bhd at RM4.75 which represents a 23% upside with 2% yield.
The research firm has also affirmed its buy call on Sarawak-based plantation company Ta Ann Bhd. It has raised the target price for the company to RM4.25 from RM3.60 which signifies a 33% upside plus a 3% yield. After inputting its revised CPO prices assumption, it has revised up its earnings for FY20 for the company by 17%.
RHB Research has also maintained its buy call on Genting Plantations Bhd with a new sum of parts target price of RM13.15 from RM12.15 which marks a 24% upside. After imputing its revised CPO prices assumptions, it has lifted its FY20-FY21 earnings for the company by 13%-29%. Given that Genting Plantations is still largely an upstream company (78% of adjusted Ebitda), it will be able to capitalise on higher CPO prices and present better 1H20 earnings. – Jan 20, 2020
