07/08/2017 (The Star) - Hong Leong Investment Bank Research (HLIB Research) has maintained its "Neutral" stance on the plantations sector as it believes recent strength in CPO prices will unlikely sustain into 2018 due to the absence of apparent demand growth catalyst and supply concerns.

The research house says it believes 2017 CPO price will average higher than its earlier projection of RM2,500/tonne owing to the average YTD CPO price of RM2,890/tonne and dry weather concerns in the US, which will have a lingering effect on soybean prices between now and the harvesting season in October 2017.

However, HLIB Research also expects the high prices to fall lower beyond 2017, and is keeping its projected average CPO price at RM2,500/tonne.

In its research report on Monday, the research house cites factors that may have an effect on CPO prices includes reduced concerns on El Nino affecting palm production, an ample world soybean investory despite concerns on US soybean crop conditions, and the European Parliament recently urging the European Commission to phase out the use of vegetable oils for biofuels by 2020.

Risks noted by HLIB Research include higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of palm oil; India imposing higher import duty on palm oil; and escalating production cost, particularly labour costs.

"We raise our FY17-18 earnings forecasts for plantation companies under HLIB’s coverage (by 1-75%), mainly to reflect the upward revision in our 2017 projected average CPO price by RM200/tonne to RM2,700/tonne.

"However, we maintain our target prices, as we have already rolled forward our valuation base year to 2018 back in January 2017."

HLIB Research's top picks for the sector include Sime Darby (Buy, TP:RM10.06) and United Malacca (Buy, RM7.11).