Bumper earnings seen for plantation firms

PETALING JAYA: The plantation sector is likely to see record earnings for the January to March quarter as crude palm oil (CPO) prices stay elevated.

Prices are likely to average between RM4,000 and RM4,500 per tonne this year before declining in 2023 to average between RM3,500 and RM4,000 per tonne, according to Kenanga Research.

“Be prepared to see record quarterly earnings for the January to March quarter and we expect the CPO prices to stay higher and longer than we had anticipated a few months earlier,” it said in a report yesterday.

However, with the CPO prices starting to trade below the recent peak as well as concerns over ESG-compliance, the sector is not likely to trade at premium to the broad FBM KLCI.

The plantation sector accounts for 9.6% of the weight in the FBM Shariah Index and 9.4% of the weightage on the FBM KLCI.

“The Bursa plantation index trailed the broad market for most of 2021 despite the strengthening CPO prices due to concerns over ESG,” Kenanga said.

As such, the research house said it has a “neutral” recommendation on the plantation sector.

“We believe that ESG is important when investing. We also believe that palm oil is here to stay despite the sector’s ESG overhang as it is the most widely used edible oil in the world with a 35% share of the global edible oil and fat market of about 250 million tonnes a year,” Kenanga said.

It added that 70% of all palm oil is consumed directly or used as ingredients from cooking oil to baking shorteners as well as a cocoa butter substitute. It is the most productive oil crop in the world.

“It is competitive and leaves a much smaller environmental footprint compared with other oil crops,” Kenanga said.

While the oil palm fruits are harvested throughout the year, monthly outputs are subject to a yearly cycle.

“The peak production month is in September or October. Thereafter, the monthly harvest starts to trend down to bottom out in March before production picks up again month-on-month,” it said.

“As the second quarter typically sees the start of rising palm oil output, the CPO prices are expected to start easing,” the research house added.

It said the CPO prices were likely to remain high this year due to the tight supply situation in the edible oil market globally.

“However, we believe that the price downside for 2022 could be limited,” the research house said.

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