Disconnect between CPO and share price of planters


PublicInvest Research expects Malaysian plantation companies to post stronger earnings, owing to higher average prices of CPO. “In the fourth quarter of financial year 2020 (Q4), all plantation players except IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Ta Ann Holdings Bhd will report stronger production on a yearly basis. Nevertheless, we believe the impact of weaker production would be offset by the stronger CPO prices".

KUALA LUMPUR: There has been a disparity between crude palm oil (CPO) prices and local plantation counters, which is possibly affected by the environmental, social and governance (ESG) criteria resulting in lower interest and valuation for the plantation sector.

According to brokerage firms, planters’ share prices remained muted despite a rally in CPO prices.

This is because the market expects the price of CPO to weaken in the near term although the current high CPO prices are sustainable, said PublicInvest Research.

Meanwhile, UOB Kay Hian Research said Malaysian plantation companies’ stocks were “trading sideways” since November 2020 compared with the stock prices of planters in Singapore and Indonesia, which which have risen between 20% to 30%.

“We reckon that this is mainly due to the concern about ESG issues affecting Malaysian companies, ” the research house added.

For this year, UOB Kay Hian is keeping a market weight recommendation on the plantation sector with its CPO price assumption at RM3,000 per tonne.

For the fourth quarter of 2020 (4Q20), PublicInvest Research expects Malaysian plantation companies to post stronger earnings, owing to higher average prices of CPO.

“In the fourth quarter of financial year 2020 (Q4), all plantation players except IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Ta Ann Holdings Bhd will report stronger production on a yearly basis.

“Nevertheless, we believe the impact of weaker production would be offset by the stronger CPO prices, ” it said.

The average price of CPO rose to 35% at RM3,373 per tonne in 4Q20 compared with RM2,491 per tonne a year ago.

However, PublicInvest Research expects CPO prices to weaken after March when production starts to pick-up.

Meanwhile, the inventory level at 1.32 million tonnes in January was slightly above market expectation compared to market expectations of 1.21million tonnes to 1.25 million tonnes mainly due to lower exports, which plunged to a near-14 year low, according to Malaysian Palm Oil Board.

Given the bearish data, CPO futures rose RM54 per tonne to close at RM3,626 per tonne on Feb 10 likely due to the release of strong recovery in export figures for the first 10 days of February.

For February, Kenanga Research expects exports to pick up pre-Chinese New Year, forecasting around 28.3% month-on-month (m-o-m) rise. Validating its view, export data from cargo surveyors for Feb1 to Feb 10 showed an average increase of 50% m-o-m exports.

In line with its peak-to-trough production study, Kenanga Research also forecasted a 12.2% m-o-m production to rise to 1.26 million tonnes in February.

The research house believes India’s recent policy changes on import duties are “detrimental towards CPO’s competitive advantage against rival oils and would harm demand for CPO.”

India’s raised the import duty on CPO by 5.5 percentage points to 35.75%, effective Feb 1.

However, there was no change to the import duty on crude soybean oil and crude sunflower oil, which remained at 38.5%.

Kenanga Research also noted that Malaysia is also likely to lose market share in terms of the exports of refined palm oil products given Indonesia’s refiners’ advantage from the current export levy and tax structure.

“Additionally, with the CPO futures curve in backwardation, it essentially discourages immediate stockpiling activity given lower forward prices, ” it said.

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