CPO production is expected to rebound by 5%-10% in 2017
KUALA LUMPUR: Affin Hwang Capital Research sees the current uptrend in crude palm oil (CPO) prices as positive for palm oil planters but it thinks there are moderating factors to it.
It said on Friday the factors include recovery in CPO production, strengthening of the Ringgit and narrower soybean oil premium.
“We think prices may stay high in 1Q17 as supply remains tight but believe CPO production could improve from 2Q17 onwards, putting pressure on prices,” it said.
Affin Hwang Research raised its 2017-18E CPO average sales price assumption to RM2,600 a tonne from RM2,400.
It upgraded Sime Darby, Felda Global Ventures (FGV) and Genting Plantation to Hold and also upgraded IOI Corp, Kuala Lumpur Kepong (KLK) and IJM Plantation to Buy.
However, it maintained its Hold rating on Hap Seng Plantation. It maintained its Neutral outlook for the plantation sector.
“CPO production is expected to rebound by 5%-10% in 2017, lower than our previous 10%-15% increment forecast, as we think the prolonged effect of El Nino would continue to affect production for first few months of 2017 before it slowly pick-ups again.
“Exports in 2017, in our opinion, should also increase partly due to better economic outlook, increase in per capita oil and fat consumption, especially in emerging countries as well as restocking by major palm oil importers like China,” it said.
For 2016/17E, the research house expects production of eight major oils to increase by 6.3% on-year to 177.3 million tonnes.
However, it expects the stock-usage ratio for the eight major oils to decline slightly to 13.3% from 13.5% in 2015/16, as increment in consumption is expected to be higher than increment in ending stocks.
Underpinned by tight global supply for palm oil especially in 1Q17 and weakness in Ringgit against the US$, it now forecasts 2017-18E average CPO prices of RM2,600 from RM2,400 previously.
“Following the increase in our CPO ASP assumptions and offsetting the decline in CPO production estimate, our core EPS forecasts for the plantation stocks under our coverage is now higher by 2-22% for 2017- 18E.
“We have revised up our CY17 price-to-earnings ratio (PER) targets for the plantation stocks under our coverage and changed our valuation methodology for Sime Darby to sum-of-parts based.
“As such, target prices for the plantation companies are raised by 10% (Hap Seng Plantation) to 69% (FGV). We upgrade Sime Darby, FGV and Genting Plantation to Hold; and also upgrade IOI Corp, KLK and IJM Plantation to BUY.
“We maintain our Hold rating on Hap Seng Plantation. As the total market cap for the Hold rated companies is more than the Buy rating, we keep the sector rating at Neutral,” it said.
