Potential in fundamentally sound plantation counters
12.05.2023 (The Star) - KUALA LUMPUR: There may still be opportunities to accumulate fundamentally sound plantation counters that have benefited from the high crude palm oil (CPO) prices in the past one year, says UOB Kay Hian (UOBKH) Research.
A potential CPO shortage in the market may also materialise because industry statistics indicate production yields have continued to decline, it added.
UOBKH Research thus expects CPO price to trade sideways in the second quarter of this year and edge higher in the second half.
“We recommend investors accumulate high dividend-yielding companies when share prices weaken, given the strong cash flow generated over the past two years by planters such as Kim Loong Resources Bhd
and Hap Seng Plantations Bhd,” it said.
UOBKH Research’s top pick for the plantation sector is IOI Corp Bhd as the group’s strong downstream margins would cushion the softening upstream earnings for this year.
Meanwhile, Hong Leong Investment Bank (HLIB) Research said recent statistics showed palm oil inventories continued to downtrend for the third consecutive month, falling by 10.5% month-on-month (m-o-m) to 1.5 million tonnes in April 2023 due to lower output.
“The stockpile came in lower than Bloomberg’s survey estimate of 1.53 million tonnes due mainly to weaker-than-expected output,” it said.
The research house said domestic palm oil output resumed its downtrend, declining by 7.1% m-o-m to 1.2 million tonnes in April 2023, likely due to the fasting month and Hari Raya holidays.
In April 2023, output contribution from the Peninsular Malaysia fell by 8.2% m-o-m while output contribution from Sabah and Sarawak dropped by 5.9% m-o-m.
HLIB Research said plantation companies under its coverage will likely register weaker earnings in their upcoming quarterly results reports due to reduced palm product prices on a year-on-year basis and seasonally lower output from the previous consecutive quarter.
“We maintain 2023 and 2024 CPO price assumptions at RM4,000 per tonne and RM3,800 per tonne, respectively, and a ‘neutral’ rating on the sector, given the absence of notable earnings growth catalysts,” it said.
Its top picks with “buy” ratings are Kuala Lumpur Kepong Bhd with a target price (TP) of RM26.27 a share and IOI with a TP of RM4.36.