DESPITE the strong crude palm oil (CPO) price momentum, Bursa Malaysia-listed plantation counters have continued to be under pressure given the declining foreign interest amid environmental, social and governance (ESG) concern.
In this regard, Bursa Malaysia’s Plantation Index has languished almost 21% from the 2021 high of 7,418.29 on Jan 8 to 6.145.97 (Aug 12, 10.38am).
This comes amid the unexpected fall of Malaysia’s palm oil inventories in July, snapping four straight gains as production weakened while exports remained steady. The 7.3% month-on-month (mom) decline to 1.49 million metric tonne (MT) – the steepest this year – was mainly attributed to a decline in production coupled with lower imports.
While this is below expectations and deemed positive for CPO price, the supply-demand imbalance has not been reflected in the share price of plantation stocks.
To-date, 2021 has been a roller coaster year for the palm oil industry. The CPO price started the year on a high note by extending its rally to the peak of about RM4,794/tonne in May before plunging 28% to a low of RM3,473/tonne in June.
Subsequently, the CPO prices rebounded and continued to trend upwards, averaging at around RM4,099/tonne year-to-date.
Elsewhere, CPO output has also fallen 5% mom and 16% year-on-year (yoy) to 1.5 million tonnes in July.
CGS-CIMB Research has attributed the mom fall which was a divergent from the historical 10-year average of a 9% mom rise largely to acute labour shortage situation at the estates.
As a result, 7M 2021 output fell 9% yoy and was below our previous 2021F CPO production forecast of 19.4 million tonnes (+1.4% yoy).
In view of this and the low probability of the Government lifting the ban on foreign workers in the near-term, the research house has lowered its 2021F CPO output for Malaysia to 18.6 million tonnes.
“Other factors that have contributed to the weaker yields and supply include ageing trees, low new planting rates, restricted movement issues affecting some estates and mills due to rising COVID-19 cases and lower fertiliser input,” noted the research house.
Amid low global edible oil inventories, tight palm oil stocks and expectation that palm oil supply in Malaysia will remain below potential for the remainder of the year due to the ongoing ban on foreign workers, CGS-CIMB Research has revised upward its average CPO price assumptions for 2021F/2022F/2023F to RM3,700/2,900/2,800 per MT (vs RM2,900/RM2,700/RM2,700 per MT previously).
“(However), the better earnings estimates are likely to be offset by concerns over ESG risks. As such, we are keeping to our ‘neutral’ call,” added the research house. – Aug 12, 2021
