Downgrade pressure on plantation sector has stabilised, says Bursa's research arm
26/10/2022 (The Edge Markets), Kuala Lumpur - The downgrade pressure on the plantation sector as tracked by the Bursa Malaysia Plantation Index appears to have stabilised following the sector's recent rebound.
In a note dated Oct 26, Bursa Digital Research said the plantation sector it tracked has nine “hold” calls versus four “buy” recommendations following a sharp decline in crude palm oil (CPO) prices between April and September this year.
“The CPO’s sharp pullback between April and September triggered a sector-wide downgrade in both earnings estimates and valuation multiples, the downgrade pressure was particularly intense during the June-August period but has since been stabilised,” Bursa Digital Research analysts wrote in a note titled “Plantations: prices stabilising around the key support zone”.
Bursa Digital Research is the local bourse's research arm. It said the latest consensus estimates suggest Bursa Malaysia Plantation index-weighted earnings per share (EPS) would normalise by -28% next year to RM487, noting that it is "still higher than any single year between 2012-2020".
“The index is currently valued at 10.1 times and 13.9 times of the financial year 2022 and FY2023 EPS, a steep discount to its five-year average of 24 times.
“Understandably, the steep valuation discount in good part reflects uncertainties over CPO’s medium to longer-term price trend,” it said.
At their recent lows, the research division said, sector leaders such as IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Genting Plantations Bhd were trading around -2 standard deviation from their five-year average across key valuation metrics including price-earnings (PE). But, valuations have somewhat expanded following the sector’s recent rebound.
Immediate support zone for CPO is RM3,600-RM3,800 a tonne
“At its low in September, CPO corrected by 55% from its record high in March. The sharp price correction saw the benchmark hit the upper-bound (RM3,200-RM3,000) of its previous multi-year sideways trading range, which also coincided with the 76% Fibonacci Retracement (measured between the historic high and the low during the pandemic).
“Since then, the commodity has rebounded 30% and it is now testing the RM4,300-RM4,500 resistance zone. Technically, the commodity may have found its medium-term (a period of more than three months, but less than 12 months) low with RM3,200-RM3,000 acting as a crucial support zone,” the research division observed.
“The price action for the past three weeks indicates a fair possibility that the commodity has entered a short-term (a period of one to three months) sideways trading/rebound phase. However, given the commodity’s recent sharp rebound, the possibility for a consolidation phase to develop in the immediate term (a period of days until three to four weeks) under the RM4,300-RM4,500 resistance zone should not be ruled out. Towards the downside, RM3,800-RM3,600 can be seen as a support zone,” it added.
Unprecedented spreads between soybean oil and CPO
Based on Bloomberg’s calculations, Bursa Digital Research said soybean oil is currently trading at extreme spreads versus the CPO as far back as the year 2000.
“The CPO’s historical price behaviours suggest whenever the spreads hit an extreme range, CPO’s prices tend to stabilise or even stage a sharp rebound.
“On soybean oil futures, despite experiencing a retracement between May-July, the commodity’s long-term price trend remains positive, with US$60-US$55 acting as a crucial support zone,” the research house added.
On Oct 26, soybean oil price was traded at US$70.04 (RM330) per bushel at 5pm. Year-to-date (YTD), it has risen by US$13.47 or 42% from US$55.63 on Dec 31, 2021, Bloomberg data showed.
For active CPO future contracts, it was traded at RM4,118 a tonne on the same day. It surged as high as RM6,270 a tonne on April 27 and fell as low as RM3,269 a tonne on Sept 28. YTD, it has climbed 5.97% from RM3,886 by end-December 2021.
Further upside seen for Bursa Malaysia Plantation Index in immediate term
The Bursa Malaysia Plantation Index was up 149.41 points or 2.2% at 6,941.49 on Oct 26, after the gauge traded between 6,792.31 and 6,943.77 throughout the day.
YTD, the index has gained 5.94% from 6,552.11 on Dec 31, 2021.
Bursa Digital Research said the index rebounded recently after testing the upper bound of the crucial medium-term support zone of 6,350-5,960 points.
“Towards the upside, a breakout following a consolidation from the said SMA line could open the door for further upside in the immediate term. Meanwhile, a price rejection from the said line may see the index retesting the 6,350-5,960 pts support zone,” it noted.