PETALING JAYA: Analysts generally have pegged the price of crude palm oil (CPO) to hover around RM4,000 per tonne till April given current strong fundamentals.
This includes low palm oil stockpile, flat output, resilient exports and higher demand ahead of the upcoming Ramadan month and Hari Raya Aidilfitri festival.
However, analysts concurred that CPO prices will ease by the middle of this year on expectation of seasonal recovery in output.
RHB Research expects palm oil stock levels will continue to decline in March as a result of low production as well as rising festive demand.
“We continue to advocate buying integrated players such as Kuala Lumpur Kepong Bhd
(KLK), IOI Corp Bhd and Wilmar International Ltd as they perform better in a lower CPO price environment,” the research house said in its latest report.
As for sector earnings, RHB Research expects a quarter-on-quarter (q-o-q) decline in the first quarter of 2023 (1Q23) on the back of lower CPO average selling prices (ASPs) and lower production in the off-peak season.
The recent 4Q22 reporting season saw mixed earnings, with six planters under its coverage booking above-expectation earnings, while five were in line, and two came in below, it noted.
The research house also made no changes to its CPO price assumptions of RM3,900 for 2023 and RM3,500 per tonne for 2024 respectively.
Many planters expect a recovery in production in 2023 – ranging from mid-single digit to low double digits – on the back of an improved labour workforce.
“Labour shortages are expected to be fully resolved by 1H23,” the research house noted.
RHB Research also said local plantation players enjoyed decent high margins in 4Q22, albeit, lower q-o-q – given the tax advantage during the Indonesian tax levy holiday.
Maybank IB Research, which is “neutral” on the sector, also maintained the price of CPO will ease by mid-year on expectation of seasonal output recovery, but projects resilient demand ahead of the Hari Raya Aidilfitri festival.
Its full year 2023 CPO average forecast stood at RM3,400 per tonne from RM5,088 per tonne in 2022.
The brokerage preferred buys include KLK, First Resources Ltd and Bumitama Agri Ltd.
In its preview on Malaysian Palm Oil Board’s latest February statistics, Maybank IB Research said palm oil stockpile eased 7% to 2.12 million tonnes, lower than street’s estimates of 2.22 million tonnes.
February’s production fell 9% month-on-month, but was sharply higher by 10% year-on-year (y-o-y). The research house cautioned about the El Nino weather phenomenon is in the making between July and December following the end of the El Nina period.
“After three years of heavy rainfall brought about by three consecutive years of La Nina, 2023’s palm oil production prospects in this region are unlikely to be thwarted by a mild or moderate El Nino, if any,” it said.
“Rather, the yield achievements in 2023 will be more dependent on whether companies have enough workers, and have sufficiently fertilised their estates over the past two years or at least in 1H23, the research house said.
Kenanga Research, meanwhile, expects firm average CPO prices of RM3,800-RM3,500 per tonne for 2023-2024, but rising production cost is an issue this year.
Despite the average fertiliser price having eased by about 20% since peaking in April-May 2022, it is still 60% above the average in 2021, the research house explained.
“Another pressure-point is the unit cost of fresh fruit bunch production, which is weighed down by old palms and replanting,” it said, adding margins are expected to stay under some pressure for 2023 as well.
However, despite maintaining a “neutral” call, Kenanga Research described the sector as highly defensive.
This is in view of the wide and versatile usage of palm oil, asset-rich books and undemanding valuations.
On the other hand, the research house said earnings are capped by limited margins upside due to rising costs, and easier y-o-y palm oil prices.
“Selectively, we prefer companies with the ability to expand upstream such as KLK or TSH Resources Bhd, which is set to expand its planted area by about 30%-50% after having de-geared.”
For investors seeking dividend yields, Kenanga Research said Hap Seng Plantations Holdings Bhd continues to look attractive.
Its target price for KLK is RM27 a share, TSH at RM1.35 and Hap Seng Plantations at RM2.30 a share respectively.
