KUALA LUMPUR: Kenanga Research is retaining its Underweight stance on the plantation sector with unchanged 2019 CPO price target of RM2,000 a tonne.
In its strategy report issued on Friday, it said increasing production leading up to peak production period in Oct/Nov 2019 and lower exports to India after the import tariff increase are likely to lead to burgeoning stockpiles in the coming months.
“All-in, after weighing the potential positives and negatives above, we believe CPO prices will remain under pressure in 4Q19, potentially trading in the range of RM1,900-RM2,200/MT.
“As such, we maintain our 2019 CPO price target at RM2,000/MT (vs. spot price of RM2,097/MT and YTD average of RM1,998/MT) and Underweight stance on the sector, ” it said.
Kenanga Research said nevertheless, should there be signs of lower-than-expected production or stronger-than-expected Chinese and/or biodiesel demand, resulting in falling stockpiles and a sharp recovery in CPO prices, it would review our sector call and TPs of planters under our coverage.
The research house maintained its Market Perform on FGV with a lower target price of 94.5 sen based on a lower price-to-book value (PBV) of 0.76 times (from 0.82 times), reflecting -1.5 standard deviation from mean, considering that the group still requires more time to return to profitability and is still expected to remain in losses in the reporting quarter to come (4Q19).
“While a pick up in FFB output should bring production cost down, this could be masked by higher fertiliser cost with c.65% to be applied in 2H19, ” it said.
The research is maintaining its Market Perform on IJM Plantation with a higher target price of RM1.50 (from RM1.40) based on a higher PBV of 0.76 times (from 0.71 times) reflecting close to -1.0SD from mean.
“Our valuation multiple upgrade is grounded on our view of subsiding risk as we expect IJM Plantation to return to the black in subsequent quarter, driven by FFB growth and slightly stronger CPO prices, ” it said.
Based on MPOB data, 2Q20 CPO prices have increased (+2%) to RM2,018/MT, while QTD 2QY20, its FFB output (Jul & Aug 2019) has increased 11%.
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