2020 seen to be a better year for plantation companies

TheEdge Thu, Dec 12, 2019 10:06am - 4 years View Original


Plantation sector
Maintain overweight:
Malaysia’s crude palm oil (CPO) production in November was lower at 1.54 million tonnes, down 14.4% month-on-month (m-o-m) and 16.6% year-on-year (y-o-y). The drop in CPO production was seen in Peninsular Malaysia, Sabah and Sarawak, declining by 14.6%, 10.7% and 17.8% m-o-m to 757,600 tonnes, 424,800 tonnes and 355,600 tonnes respectively. We believe production is likely to slow down further in the next few months given the monsoon season. Overall, Malaysia’s CPO production in the cumulative 11 months of 2019 was up by 4.6% y-o-y to 18.5 million tonnes, underpinned by improving fresh fruit bunch yields and CPO oil extraction rates throughout Malaysia. We expect Malaysia’s 2019 CPO production to rebound to about 20 million tonnes from 19.5 million tonnes in 2018 (Oil World’s forecast of Malaysia’s CPO production in 2019: 20.3 million tonnes).

We remain optimistic about the palm oil demand-supply dynamics. We expect the global palm oil inventory to decline y-o-y from 2020 with higher exports and higher consumption of palm oil products. Stronger exports and consumption will likely be supported by the energy market and food industries, in our view. Malaysia is targeting to raise its biodiesel mandate to B20 (20%) by end-2020, from B10 currently, while Indonesia’s target is B30 by January 2020, from B20 currently.

We believe the anticipation of higher demand growth rates of palm oil products — compared with the production growth rates — has positively catalysed CPO prices. CPO prices have been on a rising trend since mid-October 2019 and stayed above RM2,600 per tonne in early December. We maintain our CPO average selling price (ASP) assumptions at RM2,050-RM2,500 per tonne for 2019-2020.

Based on the US National Oceanic and Atmospheric Administration climate advisory report, the tropical Pacific has remained El Nino-Southern Oscillation (Enso)-neutral (neither El Nino nor La Nina is present), and this condition could potentially continue through the Northern Hemisphere spring in 2020 (about 60% to 65% probability). However, there is an about 25% probability that El Nino could make an appearance in spring 2020 (recent anomalous warming across the east-central equatorial Pacific).

The Enso cycle can greatly influence global weather as these cycles can alter the normal weather patterns and surface temperatures, which can cause major disruption to the world’s agricultural production and supply.

Across our coverage, we have “buy” ratings on Ta Ann Holdings Bhd, IJM Plantations Bhd, Hap Seng Plantations Holdings Bhd, Kuala Lumpur Kepong Bhd (KLK) and Jaya Tiasa Holdings Bhd, and “hold” ratings on FGV Holdings Bhd, IOI Corp Bhd, Sime Darby Plantation Bhd, Genting Plantations Bhd and WTK Holdings Bhd. We are “overweight” on the plantation sector as we expect 2020 to be a better year for plantation companies.

For sector exposure, we like: i) KLK (large-cap) as we expect its future earnings to improve on the back of higher CPO prices, coupled with its cheaper valuation compared with other large-caps (Sime Darby Plantation, IOI Corp and Genting Plantations); and ii) Ta Ann (small- to mid-cap) on the back of its improving earnings (higher log sales volume and stronger CPO production and ASPs). — Affin Hwang Capital, Dec 11

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