TA Securities Holdings Bhd has maintained its neutral call on the plantation sector as its earnings are expected to improve in 2020 due to higher palm oil prices.
It said in a note on Dec 20: “We reiterate our neutral recommendation for the plantation sector as we believe most of the negative news flows have been priced in already and demand outlook is better in 2020.
“For stock picks, we like Sime Darby Plantation (TP: RM5.92/share) for its attractive growth profile, sustainable dividend policy of 50% payout ratio, strong earnings growth prospect and attractive valuations.”
According to the research house, risks to the sector include upgrade revisions in soybean production estimates, weaker-than-expected demand in China and India and unfavourable government policies, which will affect the demand for palm oil, and lastly a further escalation of the trade war between the US and China.
“We expect higher crude palm oil (CPO) prices of RM2,400/tonne and RM2,500/tonne for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.
“We believe the price strength will sustain into 1Q CY20 before tapering off in 2H CY20. Having said that, the improved demand outlook created by the potential first phase of the US and China trade deal may vanish if both parties cannot reach a partial trade agreement,” it said.
Meanwhile, the trade tension impact arising from the US-China trade war is dramatically changing the global flow of soybeans. Note that some 80% of China soybean imports are processed and crushed domestically into meal for feed industry while the remaining 20% into soybean oil.
“We mentioned previously that the palm oil sector will not benefit from the trade war between China and US as palm oil is not suitable feed for the pig and poultry industry,” it said.
However, palm oil has benefited as one of the potential edible oil substitutes as the outbreak of Asian Swine Fly (ASF) diseases has resulted in a drop in soybean crushing activities and subsequently the decline in soybean oil supply.
Moving forward, the TA Securities said: “We see supply risk of CPO production in CY20 due to less than normal rainfall in major oil-producing provinces in Indonesia in 3Q 2019. This will delay fruit ripening and lower output.”
The situation was further exacerbated by the haze from forest fires, which hit Sumatra and Kalimantan hard.
“Overall, we opine that the weather factor will play an important role in CPO production for CY20. For Indonesia, some estimates forecast CPO production will only increase by 1-1.5 million tonnes in CY20 due to lower mature area growth, cutbacks in fertiliser use and droughts. All these will cause a positive spillover effect to CPO price,” it added.
