PETALING JAYA: Premised on expectations that crude palm oil (CPO) prices will decline, one research house is advocating building positions in integrated plantation players such as Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd.(pic)
Such players have better earnings stability as their downstream segments neutralise volatility in commodity prices and production, Kenanga Research said in a report to clients yesterday.
Ahead of fourth quarter (4QCY20) results to be released later this month, the research house said one clear winner could also be Hap Seng Plantations Holdings Bhd based on a decent CPO output and estates which are 100% located in Malaysia.
This, it said, allowed the group to fully capitalise on higher CPO prices as opposed to Indonesian upstream planters which have a price cap due to biodiesel levies and tax structures.
It said to enjoy earnings growth in 4QCY20, while limiting potential downside from an anticipated decline in CPO price, upstream planters with attractive valuations such as Hap Seng are recommended.
“We believe the planters with high concentration of production from Peninsular Malaysia and Sarawak regions would be the main losers, ” the research house said.
According to Kenanga, Peninsular and Sarawak accounted for 92% of the total quarter-on-quarter decline in CPO production.
“The decline in Peninsular was more severe, probably exacerbated by the impact of reduced fertiliser applications in 2018-2019 and labour shortage, ” it said.
In a report earlier this month, Maybank Kim Eng (Maybank KE) said CPO was losing some price competitiveness this month as the increase in Febuary’s import duty of CPO had eroded the price advantage of CPO vis-à-vis other crude and refined vegetable oils.
“With the new revision, the import duty differential between CPO and other crude vegetable oils has now narrowed to just 2.5% in Feb 2021 compared to 7.5% in November.
“Hence, we believe CPO will lose some market share back to sunflower or soybean oils, ” Maybank KE said.
AmInvestment Bank’s research unit in a report last December said it was “neutral” on the palm oil sector as it believed that there was a balance between the positive and negative factors.
“We reckon that industry palm production would rebound in 2021 after sliding in 2020, ” it said, adding that CPO output was weak in Malaysia and Indonesia in 2020, dragged by the lagged impact of the drought and haze, which took place in 3Q2019.
“On a positive note, we expect industry palm demand to recover in 2021 after being hit by Covid-19 in 2020.
“We have assumed an average CPO price of RM2,500/tonne for Malaysia in 2021, ” AmInvestment added.
Meanwhile, Bernama, quoting the Malaysian Palm Oil Board (MPOB), reported that local CPO stocks rose 9.76% to 640,781 tonnes in January 2021 from 583,811 tonnes in December 2020.
The processed palm oil stocks, however, only grew by 0.34% month-on-month (m-o-m)to 684,182 tonnes from 681,887 tonnes previously, MPOB said in its monthly palm oil industry performance report for January 2021.
Overall, it said total palm oil stocks increased by 4.68% m-o-m to 1.32 million tonnes from 1.26 million tonnes previously.
However, January 2021’s production slid 15.52% to 1.12 million tonnes versus 1.33 million tonnes in December 2020, Bernama reported.