PETALING JAYA: Analysts mostly have upgraded the plantation sector to an “overweight” call with crude palm oil (CPO) prices likely to stay buoyant given anticipations of tighter global supply, low stock levels and increasing biodiesel demand in 2025.
According to Kenanga Research, the supportive edible oil pricing environment amid global supply tightness should result in stronger earnings among plantation players over the next couple of quarters.
Furthermore, the manageable upstream cost pressures with the downstream recovery will see margins normalising from recent lows, the research house said in a report yesterday.
The Malaysian Palm Oil Board (MPOB) in its latest November statistics revealed that palm oil stocks ended lower at 1.84 million tonnes, down 3% month-on-month ( m-o-m) and fell 24% year-on-year (y-o-y) or 19% below the 10-year average.
On CPO prices, Kenanga Research said the commodity is now trading at premium to soybean and “since they are substitutes, such price differential should eventually narrow or even reverse, hence our 2024 to 2025 average CPO of RM4,000 per tonne, when it is trading above RM4,500 per tonne.”
All in all, it noted CPO price is expected to be well supported for the next quarter or two on the back of 2024 palm oil supply look set to dip by about 2% y-o-y as drier weather in south Sumatra and Kalimantan pull down yields in Indonesia.
Kenanga Research also said its preference is for purely upstream planters with less volatility and more attractive valuations.
This include Hap Seng Plantations Holdings Bhd with a target price (TP) of RM2.70, which offers good yields, Genting Plantations Bhd
(TP:RM6) with limited downstream, but, firmer property contribution ahead, TSH Resources Bhd (TP: RM1.30) for its longer term upstream expansion programme and United Malacca Bhd (TP:RM6.30) which should see rising profit from newly maturing estates.
For larger players, IOI Corp Bhd’s (TP:RM4.30) downstream turnaround potential along with its firmer upstream outlook is attractive, while PPB Bhd (TP: RM16.50) offers decent value for exposure into the region’s growing consumer essentials segment, but its earnings profile is the most volatile, the research house added.
Meanwhile, UOB Kay Hian (UOBKH) Research is cautious on the longevity of the CPO price rally, given its strong correlation with share prices.
“Our only buy call is Hap Seng Plantations (TP:RM2.25) as we continue to like the company for its upstream exposure, favourable production trend and high dividend yields,” the brokerage firm noted.
On the sector’s outlook, UOBKH Research said it expects December 2024 production to come in lower m-o-m, following the seasonal trend of tapering off in December, in addition to flash floods observed in certain parts of Malaysia and Indonesia.
“We anticipate inventory building up but at marginal rates m-o-m. This will be driven by lower exports and slower production this month,” it said.
Exports are also expected to remain weak as demand for palm oil from major importing countries is likely to stay subdued due to its price premium over other vegetable oils. This is also as Indonesia’s exports are starting to pick up.
RHB Research in a note to clients said “We see stronger fundamental prospects in 2025 on tighter global supply, increased biodiesel demand and low stock levels.
“We also maintain our CPO price assumptions of RM4,100 and RM4,300 per tonne for 2024 and 2025.”
The research house’s top picks within the plantation sector include Johor Plantations Group Bhd, Sarawak Oil Palms Bhd, Bumitama Agri Ltd, PP London Sumatra Indonesia Tbk PT and SD Guthrie Bhd.
For Hong Leong Investment Bank Research (HLIB Research), local palm oil stock level is expected to stay low for a while.
“Palm oil stock level will likely decline further in December 2024, as seasonally weaker exports (arising from the absence of festive-driven restocking activities and winter season) will be offset by seasonally lower cropping pattern,” it noted.
HLIB Research has also kept its CPO price assumptions of RM4,150 and RM4,000 per tonne, with the view that CPO price will remain at elevated levels possibly until first quarter of 2025, supported by weak near term output.
