The Star Online (08/01/2020) - PETALING JAYA: The share prices of plantation counters have caught up with the rising crude palm oil (CPO) prices and the next catalyst will be come from planters’ corporate earnings announcement, says UOB Kay Hian Research (UOBKH).

“We have raised our CPO price assumptions to RM2,400 per tonne for 2020 and RM2,350 per tonne from RM2,250 per tonne in 2020-2021 after taking into consideration the stronger price recovery since November 2019.

“The high prices are more sustainable as we expect recovery in the productivity yield to start only in late 2020 or early 2021.

“Furthermore, the stock-to-usage ratio is expected to fall to 13.1% in 2020 from about 16.9% in 2019. This will help keep CPO prices high in 2020, ” it added.

The research unit said in its regional plantation report that the plantation index has risen by 13.4% since its upgrade.

According to UOBKH, the next share price catalyst for plantation stocks is “better earnings announcements” for 2020.

The 2020 earnings will fully reflect the better (CPO) selling prices, it added.

With the higher CPO price assumptions, UOBKH has also adjusted the earnings forecasts for all the plantation companies under its coverage.

It noted that the top three companies with the highest earnings adjustments were IJM PLANTATIONS BHD, PT Perusahaan Perkebunan London Sumatra Indonesia Tbk and Bumitama Agri Ltd.

Meanwhile, companies with the lowest earnings adjustments impact include Tunas Baru Lampung Tbk, IOI Corp Bhd and PT Astra Agro Lestari Tbk.

Assuming the CPO prices trade at RM2,600 per tonne, there would be potential earnings upside of 25%, 5.2% and 28.8% for Malaysia, Singapore and Indonesia plantation companies respectively.

The research unit also preferred well-managed companies with positive production growth and good cash flow.

“We also see value in small to medium-sized plantation companies with higher earnings leverage to CPO prices, ” it added.

UOBKH “buy” call include IJM Plantations, IOI, Kuala Lumpur Kepong Bhd, First Resources Ltd, Bumitama Agri, Astra Agro Lestari, London Sumatra and Tunas Baru Lampung.

It also expects steady demand in 2020 largely driven by higher biodiesel demand from Indonesia due to the implementation of B30 mandate and market share gains as other vegetable oils were also suffering from a supply deficit.

“We are less concerned on substitutes as soybean oil and rapeseed oil are limited as well.

“The supply of vegetable oils can only respond to the high prices in the third and fourth quarter of 2020 when the new planting season for oil palm starts, ” it added.

Read more at https://www.thestar.com.my/business/business-news/2020/01/08/earnings-news-to-be-catalyst-for-plantation-share-prices