PETALING JAYA: UOB Kay Hian Research has upgraded the 2020 earnings forecasts for plantation companies on the back of a strong recovery in the crude palm oil (CPO) price.
It said the potential sector earnings upside for Malaysia will be at 20%, while the upside for Singapore and Indonesia is expected to be at 16% and 44%, respectively.
The research house said the strong CPO price recovery caught it by surprise despite the higher-than-expected industry production in the second quarter of 2020.
The CPO spot price has recovered by about RM690 per tonne, up 34% from its low of RM2,021.50 on May 12.
“We reckon the strong price recovery was led by a surge in rapeseed oil prices due to a supply shortage.
“The recovery also factored in potential disruption in palm oil production due to high rainfall, China and India resuming palm oil imports to replenish their low inventory, and market talk that China is building up extra vegoil reserves (+1.5 million to +2.0 million tonnes) to ensure better food security, ” it said in a report yesterday.
While these factors could be providing short-term support to CPO prices, UOB Kay Hian is of the opinion that the prices were likely to soften as production starts to grow towards the end of the third and fourth quarters with not much growth in demand.
Its channel checks showed that the production cycle of oil palm trees’ had been pushed back by one to two months due to weather changes last year.
Thus, the production peak would likely be towards September to November this year in Malaysia and Indonesia a month later.
“However, we are not expecting the average selling price (ASP) to retest the low of RM2,074 in May 20.
“We have raised our 2020 forecast CPO price to RM2,400 per tonne from RM2,200 to factor in better-than- expected ASP of RM2,262 per tonne in the second quarter, ” it said, adding that it also took into account the revised down stock-to-usage ratio after factoring in a smaller contraction in demand, which also offset its revised production growth of -0.6% year-on-year from -1.2% after raising Malaysia’s production to 19.2 million tonnes from 18.7 million tonnes.
Pure upstream players are expected to benefit the most and the top-three companies with the highest earnings adjustments are Sime Darby Plantation Bhd, Hap Seng Plantations Holdings Bhd and Perusahaan Perkebunan London Sumatra Indonesia Tbk.
It has also maintained the 2021 forecast CPO price at RM2,350 per tonne and a lower ASP for 2021, as it expects more supplies to come in after the yield stress in 2020.
UOB Kay Hian has retained its “market weight” rating on the sector, as it reckoned that CPO prices may soften when CPO production starts to climb in late August and is expected to peak in September to October.
It added that palm oil demand from China and India is expected to fall after their inventory replenishment.
“Plantation stocks under our coverage are not trading in depressing valuations, as most are trading at +1 standard deviation above their five-year mean price to earnings.
“With possible earnings disappointment on weaker production and potentially lower ASPs due to forward selling, share prices could retrace, ” it said.
Despite changes to its 2020 earnings forecast, UOB Kay Hian said its target prices were based on 2021 forecast earnings, and hence, most of the target prices remain unchanged.
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