RHB Research raises CPO price estimates for 2024, 2025 on El Nino effect
24/07/2023 (The Edge Malaysia), Kuala Lumpur - RHB Research has raised its projections for crude palm oil (CPO) prices to RM3,900 per tonne in 2024, and RM3,800 per tonne in 2025, as it believes that the impact of the El Nino weather phenomenon will only be felt next year.
In a note on Monday (July 24), analysts Hoe Lee Leng and Syahril Hanafiah said in the event of a moderate El Nino, supply will be not be significantly impacted, while tepid demand will weigh on prices.
"We believe prices could be higher in the second half of 2024 (2H2024) versus 1H2024, as the impact of El Nino would only be seen from May/June onwards," they said, while rolling forward valuations to 2024.
Overall, they remained "neutral" on the plantation sector, forecasting further upside, with the looming El Nino and potential escalating geopolitical risks relating to the Russia-Ukraine war and grains corridor.
However, Hoe and Syahril said “the fundamental outlook remains relatively unexciting”, with demand remaining "somewhat lacklustre", as stock-to-usage ratios are expected to remain comfortably above historical averages in 2024.
“We continue to believe that the El Nino needs to be a strong one, before CPO prices can move by above 20%, which would have a more significant difference to planters’ earnings,” the pair said.
“If the El Nino turns out to be a strong one, we will review our price assumptions,” both analysts noted.
The analysts also maintained a tactically positive trading strategy, as they believe higher CPO prices in 2024 would mean purer players would be looked upon more favourably than integrated players.
Given that, integrated players would provide a more stable earnings base and consistent dividend returns, although not all pure players would benefit equally, due to Indonesia's tax structure and poorer exchange rate. Therefore, pure Indonesian planters would not benefit as much as pure Malaysian planters.
Subsequently, Hoe and Syahril maintained an 18 to 20 times price-earnings (P/E) ratio for the plantation division of the big-cap Malaysian planters in their sum-of-the-parts valuations.
The research house also raised its target P/E ratios for the Malaysian mid-caps and regional players to eight to 12 times for 2024 (from seven to 10 times for 2023), aligning with current historical valuation averages.
Meanwhile, the analysts upgraded four stock recommendations — Ta Ann Holdings Bhd and Sarawak Oil Palms Bhd to “buy” from “neutral”, and First Resources Ltd and FGV Holdings Bhd to “neutral” from “sell”.
Hoe and Hanafiah also highlighted Kuala Lumpur Kepong Bhd (KLK), IOI Corp Bhd, Ta Ann and Sarawak Oil Palms as their top picks for the sector, as Malaysian players are preferred compared to regional players, due to Indonesia’s tax structure and currency appreciation making their earnings less competitive.