WHILE crude palm oil (CPO) prices continue to stay high – having crossed the RM5,000/metric tonne mark recently – there were no fundamental changes to trigger this spike other than the crude oil price movement.
As such, RHB Research expects such jump to be short-lived as it continues to expect fundamentals of supply to improve next year with a moderation of CPO prices in 2022.
“The main risk to this thesis is weather abnormalities. However, share prices have – for the first time this year – started moving in tandem with CPO prices,” opined analyst Hoe Lee Leng in a regional plantation sector update.
“We believe now is the time to ride the wave, and wait for a good opportunity to lock in some profits.”
Retaining its “underweight” outlook on the plantation sector, RHB Research is adamant that – in the wake of improving fundamentals and moderating prices in 2022F – earnings will soften year-on-year (yoy).
“Meanwhile, ESG (environmental, social and governance) concerns will still impact sector valuations,” noted the research house. “However, we may need to review our 2022 price assumptions should prices remain lofty for a longer period than expected.”
Although UOB Kay Hian Research also reiterated its “underweight” call on the plantation sector, it reckoned that the current high CPO price may be sustained for a longer-than-expected time due to (i) the global shortage of vegoil in the immediate term; and (ii) slower-than-expected recovery in palm oil production.
“This sector has been under-owned for at least the last four years,” opined analysts Leow Huey Chuen and Jacquelyn Yow. “The surge in CPO prices and potential good earnings have led to the recent spike in investors’ interest despite the ESG concern.”
For the longer term, however, UOB Kay Hian Research remains cautious as earnings leverage could have been diluted by lower production, forward sale contracts that were committed at prices that are much lower than current prices, and higher cost of production due to the spike in fertiliser cost.
For investors who want exposure to this sector, the research house recommended Hap Seng Plantations Holdings Bhd as (i) the company has been able to enjoy higher selling price from spot selling; (ii) it commands a premium for its RSPO (Roundtable on Sustainable Palm Oil)-certified CPO; and (iii) it has a high dividend yield of 6.8%.
“We had downgraded both Sime Darby Plantation Bhd and Sarawak Oil Palms Bhd after their share prices reached our target prices,” added UOB Kay Hian Research. – Oct 12, 2021
