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CPO price may strengthen from current level in near term

TheEdge Tue, Jun 18, 2019 11:02am - 5 months ago

Plantation sector
Maintain underweight:
Six out of nine plantation companies (namely Genting Plantations, Hap Seng Plantations, IOI, KLK, Sime Darby Plantation and TSH Resources) missed expectations, due mainly to lower-than-expected palm oil prices.

Integrated players fared better than pure upstream players, as weaker palm product prices were partly mitigated by sustained earnings contributions from downstream segment.

We believe crude palm oil (CPO) price may strengthen from the current level in the near term, supported by the African swine fever outbreak in China (which will continue to support high palm oil consumption in China over the near term) and Malaysia government’s recent move to set up a special joint committee to monitor and smooth the implementation of B20 biodiesel by 2020 (which will in turn boost palm oil consumption).

We believe the average 2019 CPO price will still come in lower than last year’s average CPO price of RM2,230 per tonne (and our projected average CPO price of RM2,300 per tonne) mainly on the back of weak CPO price year to date, ongoing trade war between the US and China (sparking concerns over slower global economic activities, hence affecting demand for vegetable oils including palm oil), and the European Union’s publication of limits on the use of palm oil in biofuels.

Given our less-than-sanguine view on CPO price over the longer term, we lower our average CPO price assumptions by RM100 to RM200 per tonne to RM2,100 per tonne in 2019 (from RM2,200 per tonne previously) and RM2,200 per tonne in 2020.

Correspondingly, we lower our core net profit (CNP) assumptions for plantation companies under our coverage by 2.1% to 53.6%, on top of the downward revisions we have made during the May reporting season.

We revise our target prices for plantation stocks by 0% to 52.9%, to reflect: i) the downward revisions in CNP forecasts; ii) rollover of valuation base year (to 2020 from 2019); and iii) the switch in our valuation methodologies for upstream plantation players (which are Hap Seng Plantations, IJM Plantations, Sime Darby Plantation, and TSH Resources) to price-to-book value (from price to earnings earlier). Following the revisions in our target prices, we downgraded our rating on TSH Resources to “sell” (from “hold” previously). Ratings for other plantation stocks, on the other hand, remain unchanged.

We maintain our “underweight” stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations. — Hong Leong Investment Bank Research, June 17

Related Stocks

GENP 10.640
SIME 2.330
TSH 1.380


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