PETALING JAYA: Plantation companies should continue to enjoy strong prices in the second quarter but downward pressure on prices is anticipated as the sector enters a stronger supply season in the second half of the year, says Kenanga Research.
Nevertheless, the research firm said crude palm oil (CPO) prices are likely to stay healthy as price downside would be moderated by several factors.
Firstly, international edible oils and fats situation is expected to remain tight until 2023 in spite of higher palm and soya bean oil production in the second half of 2022, and some demand destruction due to high asking prices.
Secondly, the research firm noted that the inventory levels of big palm oil buyers such as India and China were also not very high.
Furthermore, China has yet to fully restart its economy from Covid-19, so demand can be expected to pick up as its economy normalises.
Lastly, it said the global economic restart and high energy prices would mean there is latent demand for biofuels in the event vegetable oil prices fall sufficiently low.
The research firm in its first-quarter 2022 (1Q22) results review noted that CPO prices had surged on the back of the Russia-Ukraine conflict, which caused an edible oil supply disruption as Ukraine is a major producer and exporter of sunflower oil to Europe.
Despite the strong prices, Kenanga Research said the 1Q22 results for plantation were slightly disappointing because of weaker production.
It noted that fresh fruit bunch production was generally good compared to a year ago but poorer than the previous quarter.
Only two out of 10 companies under its coverage performed better than expected. Five companies’ results were in line, while three fell short of its expectations.
“For 2022, we forecast CPO price of around RM4,500 and it should trend down to about RM4,000 per tonne by 2023,” the research firm said.
Maintaining a “neutral” call on the plantation sector, it said rising production cost was a concern but overall cost inflation for 2022 should remain manageable.
Seasonal recovery in fruit output over the second half of the year is expected to help mitigate some of the higher field costs.
“Of greater concern is the shortage of workers in Malaysia. The first batch of 32,000 foreign workers have yet to arrive and the busy peak harvesting season is starting soon, within a month or two,” it added.
Kenanga Research said it continues to be selective on companies in the sector.
“We like Kuala Lumpur Kepong Bhd for its acquisition of IJM Plantations Bhd which will mean strong year-on-year growth for financial year 2022.
“We also like Hap Seng Plantations Holdings Bhd’s strong net cash position which allows it to pay good dividends,” it said.
Meanwhile, it noted that TSH Resources Bhd is rapidly de-gearing hence faster planting of new areas is likely. This will provides investors with visible long-term growth prospects.