KUALA LUMPUR (Jan 21): Mid-sized upstream plantation players such as Hap Seng Plantations Holdings Bhd, IJM Plantations Bhd and TSH Resources Bhd will likely see better share price performances in the near term, supported by decent valuations and strong earnings in the coming results season, said Hong Leong Investment Bank (HLIB) Research.

In a sector update today, HLIB 's Chye Wen Fei said this is despite having factored in much lower crude palm oil (CPO) price assumptions of RM2,700 per tonne for 2021 and 2022.

She said that mid-sized planters are trading at a financial year 2021 (FY21)-FY22 price-earnings ratio (PER) of 20 times, and CPO prices in the fourth quarter of 2020 (4Q20) were 22.2% to 35.5% higher quarter-on-quarter (q-o-q) and year-on-year (y-o-y) respectively.

Meanwhile, the surge in CPO prices since mid-May 2020 was not entirely reflected in the KL Plantation Index (KLPL), which rose by a smaller magnitude of less than 20% during the same period, the analyst said.

“We note that certain plantation companies under our coverage (such as Hap Seng Plantations, IJM Plantations and TSH Resources) are still trading at notably lower than their share prices in early January 2020,” she noted.

According to Chye, the surge in CPO prices by more than 70% from a low of RM2,022 per tonne was due to concerns over edible oil supply tightness (arising from the La Nina phenomenon and labour shortfall in Malaysia) and aggressive restocking activities (particularly among major edible oil-consuming countries as a result of low stockpile levels). 

Chye views that decoupling between share prices of plantation companies and CPO prices could be due to several reasons, including investors’ concerns over CPO sustaining at a high level over the longer term (particularly when output eventually recovers), high valuations of listed planters in Malaysia versus their neighbouring peers, and investors’ growing emphasis on environmental, social and governance (ESG), which may have resulted in them shying away from the sector despite improving earnings prospects.

Chye said despite having anticipated CPO prices to weaken from the second quarter of 2021 (2Q21) onwards, CPO prices will still remain at a decent level over the longer term.

"We believe output recovery will be partly offset by the Indonesian government’s commitment to its B30 biodiesel mandate in 2021, which will, in turn, support palm oil consumption, and low edible oil stockpiles among key producing countries and consuming countries.

"Besides, timing of production recovery for edible oils (including soybean and palm oil) taking place remains unknown (which in turn depends heavily on weather condition), and a delay in production recovery for edible oils [if it happens] will result in CPO prices staying at an elevated level for a longer period of time," she said.

Chye also noted that valuations of mid-sized upstream plantation companies (such as Hap Seng Plantations, IJM Plantations and TSH Resources) are still undemanding, which in turn indicate decent upside potential.

"Mid-sized upstream plantation players will likely report better performances in the coming results season q-o-q and y-o-y due to higher fresh fruit bunch (FFB) output and CPO selling prices," she added.

Chye maintained her average CPO price projections of RM2,700 per tonne for 2021 and 2022.

She also maintained her "neutral" stance on the sector, and had "buy" calls on Hap Seng Plantations (target price [TP]: RM2.17), IJM Plantations (TP: RM2.29) and TSH Resources (TP: RM1.38).