21.11.2019 (The Edge Markets MY) - Plantation sector
Upgrade to overweight: We are turning more positive on the plantation sector as we believe the current positive crude palm oil (CPO) price sentiment will sustain into 2020 due to supply constraints arising from potential palm production deficits in Malaysia and Indonesia, lower soybean output in the US and more positive demand prospects (arising from higher biodiesel mandates in Malaysia and Indonesia from 2020 as well as the spreading of African swine fever [ASF]). Given our more bullish stance on the sector’s prospects, we raise our average CPO price assumption for 2020 to 2021 by RM200 per tonne to RM2,400 per tonne, and upgrade our rating for the sector to “overweight”. Our top picks are FGV Holdings Bhd (“buy”; target price [TP]: RM1.42), Genting Plantations Bhd (“buy”; TP: RM11.18), Hap Seng Plantations Holdings Bhd (“buy”; TP: RM1.68), Kuala Lumpur Kepong Bhd (“buy”; TP: RM24.37) and TSH Resources Bhd (“buy”; TP: RM1.05).

 
The price spread between soybean oil and CPO has narrowed to approximately US$75 (RM312) per tonne from a historical five-year average of US$100 per tonne. We believe the price spread between the two will likely remain (if not narrow further) as the ASF outbreak and the biodiesel mandates in Malaysia and Indonesia will continue to drive palm oil consumption.

Corresponding to the change in our CPO price assumption, we raise our financial year 2020 (FY20) and FY21 core net profit forecasts for plantation companies under our coverage.

We raise our TPs for plantation stocks under our coverage by 13% to 36.5% to reflect: i) the upward revision of our core net profit forecasts; ii) a switch in our valuation methodologies for upstream plantation players to price-earnings (PE) multiples (from price-to-book value multiples); and iii) an upward revision of our target PE multiple (by two times PE multiple) for the integrated players. Except for FGV and IOI Corp Bhd (“hold”), ratings for all other plantation stocks under our coverage have been upgraded. — Hong Leong Investment Bank Research, Nov 20