PETALING JAYA: Despite the current global economic uncertainties, the plantation sector is expected to stay resilient in the fourth quarter of 2022 (4Q22), says Kenanga Research.
The research house has maintained an “overweight” recommendation on the sector given its defensive qualities.
In its 4Q22 Investment Strategy report, Kenanga Research said the 2Q22 earnings reporting season marked the end of peak plantation earnings as palm oil prices eased by over 30% since June this year.
“So, earnings are expected to moderate into 2H22, but with margins staying quite robust,” it added.
Although crude palm oil (CPO) prices have come off from peak levels, Kenanga Research noted the forecast average CPO prices of RM4,500 per tonne for 2022 and RM4,000 per tonne in 2023 are still decent.
Kenanga Research added that “while production costs may be pushed up by rising fertiliser, labour and transportation costs, all in all, costs should stay within the RM2,000 to RM2,500 per tonne range, translating to rather healthy upstream margins for the plantation sector”.
Despite the earnings downtrend, Kenanga Research noted the plantation sector ratings may be approaching a bottom.
“The sector is already trading at a prospective FY23 price-to-book value of just 1.2 times, with a forecasted FY22 to FY23 price-to-earnings ratio (PER) of 10 to 11 times, which is approaching replacement level ratings.
“The net tangible asset is also solidly backed by land banks with manageable-to-low gearing or even net cash,” said Kenanga Research.
In the longer term, the upstream earnings would be supported by CPO usage in the production of essential daily consumables as well as in food and fuel, added Kenanga Research.
‘We also surmise that the equity market has factored in CPO prices of RM3,500 to RM4,000 per tonne into FY23 earnings,” it said.
Meanwhile, it believes that the plantation sector is slowly overcoming its environmental, social and governance (ESG) overhang.
“With an oil yield of 3.5 tonnes per ha, it is the most productive oil crop in the world, thus leaving the smallest environmental footprint and allowing the sector to stay profitable even after incorporating additional costs for ESG improvement,” it added.
Kenanga Research said testament to this success is that about 16 million tonnes of palm oil are now certified, meeting some of the highest ESG standards for agricultural produce worldwide.
