Rich valuations and unexciting earnings growth ahead for plantation sector

Malaysian palm oil futures made their sharpest daily gains in a month on Thursday, tracking rises in soyoil on the Chicago Board of Trade and supported by a weaker ringgit, traders said

KUALA LUMPUR: UOB KayHian Research maintained its Underweight stance on the Malaysian plantation sector, on rich valuations and unexciting earnings growth compared to peers listed in Singapore and Indonesia. 

The research house said on Wednesday that the outlook for next year remained gloomy as CPO prices are expected to experience significant weakness.

This is as palm oil is likely be in oversupply in mid-2018. 

“We advocate investors to Sell on strength on the back of the expected upcoming strong quarterly results and high CPO prices,” it said.

However, it has a Buy on Kim Loong Resources as it expects good results and dividend.

It has Sell calls on IJM Plantations, IOI Corp and TH Plantations.

The research house noted that the CPO price weakness since early-November 2017 was due to concerns of weaker demand from India following the import duty hike and the pile-up of inventories. 

It expects CPO prices to hover at between RM2,500 and RM2,700 per tonne in Q1’18 as the sector enters the weak production period. 

Meanwhile, CPO prices are expected to decline from 2H18 on a significant increase in production, with prices trending lower to RM2,200 to RM2,400 per tonne from May 2018, it said.