No near-term catalysts seen for plantation sector
19/11/2022 (The Star Online) - THE plantation sector does not appear too compelling at the moment as there are no significant catalysts in sight.
Analysts who track the sector are mostly maintaining their “neutral” calls on it as many reckon that crude palm oil (CPO) – one of the industry’s main outlook determinants – is not expected to see any rally soon.
Former investment banker and private investor Ian Yoong Kah Yin, who tracks the plantation industry closely, reckons the sector is a “wait-and-see” sector.
“I expect the CPO price to trade between RM3,600 and RM4,500 per tonne in 2023.
“It is currently trading at RM3,900 per tonne. I do not see any catalyst for a significant rally in 2023,” Yoong tells StarBizWeek.
Yoong says the short rally in plantation stocks in the second quarter of this year (2Q22) was mainly due to the spike in CPO during that period.
“The spike in turned was caused by a perceived shortage of edible oils due to the Russia-Ukraine war.
“Ukraine is the largest producer of sunflower oil in the world. It, however, had produced a relatively small amount (3%) of global edible oil, just before the war,” Yoong adds.
He says the fear of a severe edible oil shortage was then blown out of proportion and this was accompanied by bullish forecasts by many research analysts, causing the rally in plantation stock prices here and regionally.
Yoong says a major concern for plantation companies is the tight labour situation because of the shortage of foreign workers.
“This has increased the wage bill and impaired the profitability of plantation companies. The cost of production has risen from about RM1,700 per tonne to RM2,400 per tonne in just 12 months,” Yoong adds.
On the plantation stocks that he likes, Yoong says Kim Loong Resources Bhd is a “well managed plantation company” trading at 10 times price to earnings, relative to FY23 forecast earnings, and has a dividend yield of 8%. It is also in a net cash position.
“The big plus of well managed plantation companies with mature acreage is that they generate a lot of cash.”
Meanwhile, in her report to clients, Affin Hwang Investment Bank plantation analyst Nadia Aquidah says palm oil price has declined by around 55% to 60% from the record-high levels registered in March 2022, and had settled in the range of RM3,300 to RM3,700 in early October.
“The continual price pressure on palm oil products is partly due to the high inventory levels in Indonesia as well as Malaysia and the sharp increase in export supplies of palm-oil products in Indonesia,” she tells clients.
“We are cautious on the economic outlook in the second half of 2022, given uncertainties amid the rising pressure of inflation and prolonged Ukraine-Russia conflict.
“There are many uncertainties and price-determining factors to watch out for, which include the global harvest progress and actual yields achieved for all major edible oils, quantum of purchases from major importing countries like China and India, uncertainty over the export corridor for Ukrainian products, weather developments, as well as Malaysia and Indonesia’s production and stock movements.”
Nadia says Affin Hwang is keeping CPO assumptions at RM4,900 per tonne for 2022 and RM3,100 to RM3,200 per tonne for 2023.
Maybank Investment Bank analyst Ong Chee Ting says CPO price should recover somewhat and narrow its gap with other edible oils by year-end as the market looks forward to 1Q23’s anticipated seasonally low output cycle.
“On Oct 11, the Australia Bureau of Meteorology reiterated its view that La Nina is likely to persist into early 2023, and the negative Indian Ocean Dipole (IOD) event will also continue until end of the year.
“The combination of La Nina and negative IOD is likely to bring above average rainfall to Malaysia (and the region), prompting Malaysia’s Meteorology Depart-ment to warn of possible flood risks for parts of Peninsular Malaysia in November and December which in turn may disrupt palm oil supply,” Ong says in a report to clients.
“Across the globe, La Nina could also impact South America’s ongoing planting and eventual harvest in 1Q23. The market is presently anticipating a large harvest from South America on the assumption of normalised weather.”
“We believe CPO price will trade sideways for now and will make a gradual recovery towards year-end. Stay neutral.”
KLK, IOI preferred stocks
Maybank’s regional preferred “buys” include Malaysia’s Kuala Lumpur Kepong Bhd (KLK).
RHB Research, which is also maintaining its “neutral” call on the sector says it believes medium-term prospects for CPO prices are improving, given the ongoing supply risks and improving demand outlook.
“In the short-term however, prices could be largely influenced by Indonesia’s export policies and the impact this would have on Malaysian palm oil stocks.”
The research house, which has also picked KLK alongside IOI Corp Bhd (IOI) as its top local plantation picks, expects CPO prices to stabilise at slightly higher levels in 1H23 – once the impact of Malaysia’s labour-affected CPO output is felt on stock levels towards the end of the year – before falling back in 2H23 on the onset of peak output.
“Our CPO price per tonne assumptions are RM5,100, RM3,900 and RM3,500 for 2022, 2023, and 2024.
“In terms of earnings growth, regional average earnings growth for 2022 now stands at 36% year-on-year, but this falls to 20.1% in 2023,” RHB adds in its October sector update to clients.
“We maintain our ‘neutral’ sector call with a trading strategy. While we believe supply-demand dynamics are improving, Indonesia’s export policies could keep prices weak in the short-term. In this environment, we prefer the integrated players like IOI, KLK and Wilmar International Ltd (listed in Singapore) as they would be able to withstand a lower CPO price environment better than the purer planters.”