FROM oil and base metals to livestock and agriculture products, commodities have undoubtedly started 2021 with a bang, surging to levels not seen for years.
Despite the global economic shock of the COVID-19 pandemic has driven most commodity prices down initially, most commodity prices have recovered in 3Q 2020 with the good run spilling over to 2021 albeit with uneven rally.
Envisaging a commodity price rally, TA Securities Research nevertheless caveated its outlook as “heavily dependent on the recovery path of the COVID-19 pandemic and success of the ongoing vaccination programmes to contain the pandemic” thus steering the global economy on a steady growth path.
Below are some commodities-related outlook by the research house:
Oil price: The re-opening of locked down economies will kickstart global recovery and boost demand for transportation fuels. Additionally, restoration of manufacturing output will catalyse demand for petrochemicals.
Earnings for oil & gas (O&G) players are expected to improve from 2H 2022 onwards. However, in the case of petrochemical producers, earnings growth may be relatively muted given an exceptionally high base in CY2021.
TA Securities Research maintained an “overweight” stance on the sector with top stock recommendations being:
- Serba Dinamik Bhd (target price: RM2.10) on the back of robust outstanding orderbook, new projects to catalyse earnings expansion and successful diversification into ICT projects; and
- Petronas Chemicals Bhd (target price: RM9.10) due to strong balance sheet, sustained strong petrochemical prices in 2021 and solid PMI readings indicate higher demand for petrochemicals.
Crude palm oil (CPO) rally: TA Securities Research expects the average CPO price for 2021 and 2022 to be firmer and higher than 2020.
Sector earnings are expected to grow in CY2021 and CY2022 as it believes that when the COVID-19 pandemic wears off, the consumption of edible oil will resume and this would boost palm oil demand and support CPO prices.
The research house maintained its “overweight” outlook on the plantation sector with “buy” calls on Kuala Lumpur Kepong Bhd (target price: RM30.26) and IJM Plantation Bhd (target price: RM2.77).
Building materials sector: China as the world’s largest steel producer as well as consumer is playing a crucial role in the global steel market. Global steel price in 2H 2021 is likely to remain on the high side after considering a combination of fiscal stimulus globally, recovering economic activities and the steel production capacity cut in China.
On the domestic front, TA Securities Research expects the average steel bar price to be supported at above RM2,400/metric tonne level for 2021 backed by existing demand from the construction and property players and less intense price competition in Malaysia.
Its top picks are Chin Well Holdings Bhd (target price: RM1.63) as the group is expected to secure more orders from US market due to trade diversion and CSC Steel Holdings Bhd (target price: RM1.95) as the group is expected to be the primary beneficiary of the strong flat steel prices.
F&B and consumer sector: Recovery in volume and demand could offset cost pressure and result in earnings growth from 2020’s low base.
Thereafter in 2022 when prices of commodities normalise owing to improved crop production, companies in the consumer sector are likely to be relieved from cost-push pressure, hence mark another year of earnings growth.
Nevertheless, TA Securities Research does acknowledge the recovery in some sub-sectors could be protracted due to unfavourable movement control measures that are still in place and temporal shift of consumption/purchasing pattern.
Top “buys” within the consumer sector are Leong Hup International Bhd (target price: RM1.02) and Scientex Bhd (target price: RM5.05). – May 18, 2018
