PETALING JAYA: Headwinds are looming in the plantation sector, with planters likely to post weaker earnings ahead, says Kenanga Research.
The research house said earning for the first quarter of 2022 (1Q22) and 2Q22 have captured the recent peaks in crude palm oil (CPO) prices, so weaker prospective profits are due for planters.
“We suspect equity investors have already priced in CPO of between RM3,500 and RM4,000 per tonne for financial year 2023 (FY23) earnings,” Kenanga Research said in a note to clients.
Therefore, the research house’s assumptions are unchanged at RM4,500 per tonne for FY22 and RM4,000 per tonne for FY23.
The plantation sector’s latest 2Q22 results were within Kenanga Research’s forecasts.
Despite the year-on-year (y-o-y) downtrend in earnings on weaker CPO prices, the research house said the plantation sector ratings may have bottomed out.
It added that “the sector’s prospective FY23 price-to-book value (P/BV) of just 1.2 times and FY22-FY23 price-to-earnings ratios (PERs) of 10 times to 11 times are approaching replacement level ratings.”
While CPO prices may be off recent peaks, Kenanga Research noted that this does not mean the sector is facing a disaster or going to do badly.
“Even at CPO prices of RM3,500 to RM4,000 per tonne, operating margins and cash flows are still good, as production cost is estimated to hover between RM2,000 and RM2,500 per tonne moving into 2023,” it said.
It said the palm oil sector is a unique source of two essential consumables, of which about 70% of palm oil is consumed as food while another 20% ends up as biodiesel.
As such, besides earnings volatility due to CPO prices, Kenanga Research said the long-term earnings are underpinned by exposure to defensive essential day-to-day consumable products.
Stock valuation-wise, it said “not only the P/BV is just above net tangible asset (NTA), but the NTA is also solidly backed by landbank with manageable-to-low gearing levels, some even holding net cash.”
In view of the sector’s defensive qualities and the global economic uncertainty, Kenanga Research maintained an “overweight” call on the sector.
“Within the sector, we like those offering good sustainable yields such as Hap Seng Plantations Holdings Bhd with a target price (TP) of RM2.80 and Boustead Plantations Bhd
with a TP of 95 sen,” it said.
Kenanga Research also said due to dwindling land availability and tightening regulations, upstream expansion has almost stagnated for many players for several years now.
The downstream expansion is best measured on a case-by-case basis as “they can vary from simple refining to complex agribusinesses,” it added.
The research house also liked Kuala Lumpur Kepong Bhd with a TP of RM28 and TSH Resources Bhd with a TP of RM1.80 for their better upstream growth prospects.
