Downtrend: CPO prices are likely to decline on higher supply, towards RM2,250 per tonne, over the the third quarter of 2016.
PETALING JAYA: Most research houses are maintaining a “neutral” call on the plantation sector, given the rising stocks and increasing production, but the average crude palm oil (CPO) price forecast for 2016 remains intact at RM2,400-RM2,500 per tonne.
Kenanga Investment Bank Bhd, in its third quarter (Q3) 2016 strategy report yesterday, said as peak production season came in, CPO prices were likely to decline on higher supply, towards RM2,250 per tonne over Q3 the third quarter.
While the biodiesel mandates are expected to continue to support CPO prices, this would unlikely catalyse the market, given the slow uptakes.
Instead, a year-end La Nina phenomenon could boost CPO prices in Q4 2016, with appreciation potential of at least RM120 per tonne for year-end CPO prices of about RM2,400 per tonne.
On the CPO price outlook, Kenanga said that investors should adopt a trading view by trimming holdings in early Q3 2016 and position for a rebound in late-Q3 2016.
The research unit continues to like Kuala Lumpur Kepong Bhd (KLK) for lower downside risk, given its big cap status and integrated operations, while its positive fresh fruit bunches growth should provide good earnings upside.
It has also upgraded TSH Resources Bhd and Ta Ann Holdings Bhd as “we believe the recent price correction was overdone.”
Furthermore, Kenanga is maintaining a “market perform” call on Felda Global Ventures Holdings Bhd but up its target price to RM1.58 on strengthening investors’ confidence and guided Q2 2016 production recovery.
Meanwhile, UOB Kay Hian is maintaining its CPO price assumption of RM2,500 per tonne this year as CPO prices should strengthen towards late third quarter to early Q4 2016 on the back of a recovery in production, and a wider CPO price discount to soybean oil.
The discount has increased from US$14.7 per tonne on May 26 to US$49.90 per tonne on July 11 this year.
Moreover, Indonesia’s B20 programme is doing well, with first five months 2016 domestic consumption recording 4.5 million tonnes (about 54% of 2015 domestic consumption).
UOB Kay Hian also expects Sabah-based companies to report better quarter-on-quarter (q-o-q) results in Q2 this year.
Based on the production data, Sabah reported the largest q-o-q increase in production versus Sarawak and Peninsula Malaysia.
Besides better production growth, selling prices are also higher q-o-q.
Among the plantation stocks under UOB Kay Hian’s coverage, Genting Plantations Bhd, IJM Plantations Bhd and IOI Corp Bhd have the highest exposure to Sabah.
MIDF Research is maintaining its average CPO price assumption at RM2,450 per tonne for 2016, about 14% higher than 2015 average of RM2,153.50 per tonne.
“We believe that China is likely to stock up palm oil in the near term as the inventory has fall down to below average level in major ports.
“Our top pick is KLK due to its earnings which is expected to benefit from high CPO price given its high exposure to palm oil business and good earnings growth of 41% year on year to RM536mil in the first half 2016.
“It is also one of the rare big cap index-linked planters, which is syariah-compliant and also an RSPO (Roundtable on Sustainable Palm Oil) member,” it added.