Kenanga research maintains neutral on plantations, CPO prices expected to rise

The company told Bursa Malaysia yesterday that revenue for the current quarter improved year-on-year (y-o-y), mainly due to higher fresh fruit bunch (FFB) production from Indonesia, apart from the higher sales of refined palm products.

KUALA LUMPUR: Kenanga research has maintained its neutral outlook on the plantations sector despite expected improvements in CPO prices.

It said this was due to uncertainties from the trade war, which will hurt industry sentiment and put a cap on CPO prices beyond assumptions.

Kenanga expects CPO prices to be boosted by easing inventory, biodiesel initiatives in Indonesia and Malaysia, a reduction of India's import levy on CPO and a slowing production in Indonesia as palms take a rest post-bumper harvest.

"Premised on these potential developments, we reiterate our 2019 CPO price forecast of RM2,400/MT (vs. YTD average of RM2,048/MT), representing a 7% increase from RM2,235/MT in 2018," it said.

The research house expects demand from China to recover sharply after registering a low base in February, while exports to India could retrace from a high base as the buying frenzy from a lower import tax subsides.

"Meanwhile, we expect demand from the EU region to remain stable given the recent recovery in crude oil prices, which makes CPO more attractive for feedstock in biofuels. 

"Overall, we believe exports volume will improve 10.5% MoM to 1.46m MT in March 2019," it said.

In February, inventory of 3.05mil metric tonnes (MT) came as a negative surprise, falling below both its and consensus expectations.

The research house said this was due mainly to a sharper-than-expected drop in export volume, mainly from China's 75% month-on-month (m-o-m) decline to 80,000 MT due to fewer working days during the Chinese New Year month.

The decline was cushioned by the 41% m-o-m increase in Indian demand to a multi-year high of 449,000 MT.

TSH is Kenanga's only outperform call in the sector due to its above-average production growth outlooks, higher earnings sensitivity to potential CPO price recovery and is the only pure upstream planter under its coverage that is still profitable.