Plantations defensive amid uncertainty


PETALING JAYA: With stockpiles to remain elevated this month, crude palm oil (CPO) prices are likely to stay weak but the downside will be capped by the commodity’s attractive discount against competing edible oils, says CGS-CIMB Research.

“We believe CPO prices could trade in the RM3,500-RM4,500 per tonne range in October 2022. Prices are likely to stay weak in October due to competition from higher Indonesian palm oil exports,” the research firm said in a note to clients.

It projects palm oil stocks to rise 8.2% month-on-month (m-o-m) to 2.5 million tonnes by the end of this month as rising output trump higher exports.

As at end-September, local palm oil stocks climbed to 2.31 million tonnes – the highest since October 2019.

It said Malaysia’s palm oil stock was trending higher due to seasonality factor and stiff competition from Indonesia’s palm oil.

The rising stock, coupled with an Intertek report that Malaysia’s palm oil exports for the first 10 days of October fell 13.4% m-o-m, are likely to dampen near-term CPO prices in the country, it added.

On the back of lower prices, CGS-CIMB Research forecasts plantation companies involved in the upstream segment will post weaker third-quarter 2022 (3Q22).

“The average Malaysian Palm Oil Board CPO price fell 39.1% quarter-on-quarter (q-o-q) and 9.6% year-on-year (y-o-y) in 3Q22 to RM3,990 per tonne, which more than offset the 13.5% q-o-q and 2.7% y-o-y rise in CPO production achieved by Malaysian estates in 3Q22.

“These, coupled with higher operating costs due to the hike in minimum wage, rising fertiliser costs as well as the prosperity tax, are likely to dent planters’ 3Q22 earnings,” said the research firm.

Despite the downward bias, Kenanga Research is keeping an “overweight” call on the sector due to its defensiveness amid global economic uncertainties.

It noted that the KL Plantation Index has been holding better than the broader market since June 2022, driven by resilient food and fuel demand, asset-rich net tangible assets and undemanding valuations.

“Within the sector, we like those offering good dividend yields or the ability to expand upstream where little growth has been seen for the past three to five years,” it said.

Its stock picks are Kuala Lumpur Kepong Bhd (KLK) and TSH Resources Bhd for growth. Meanwhile, for dividend yields, it likes Hap Seng Plantations Holdings Bhd and Boustead Plantations Bhd.

Hong Leong Investment Bank (HLIB) Research also has an “overweight” call on the plantation sector. It said sector valuations are commendable following the sharp correction in share prices recently.

For exposure, HLIB Research prefers integrated players such as KLK and IOI Corp Bhd.

The research firm said it was in the midst of reviewing its 2022-2024 CPO price assumptions of RM5,500/RM4,500/RM3,800 per tonne.

This comes on the back of improving supply prospects, uncertain demand outlook as well as Indonesia’s continuous move to clear its palm oil inventories.

It noted that after hitting an all-time-high of RM8,074 in early March 2022, CPO prices have been trending down and averaged RM5,442 year-to-date.

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