KUALA LUMPUR (March 5): Hong Leong Investment Bank (HLIB) Research maintains its "neutral" call on the plantation sector, as the research firm believes the current high crude palm oil (CPO) price will not sustain over the longer term.

In a note today, the research firm named its top picks, namely Hap Seng Plantations Holdings Bhd with a "buy" call and target price (TP) of RM2.17, IJM Plantations Bhd (buy, TP: RM2.29), and TSH Resources Bhd (buy, TP: RM1.35).

At the time of writing, shares of Hap Seng Plantations were up three sen or 1.61% to RM1.89, valuing the group at RM1.51 billion. Meanwhile, IJM Plantations was unchanged at RM1.82 with a market value of RM1.6 billion, while TSH Resources was up one sen or 0.95% to RM1.06, translating into a market capitalisation of RM1.46 billion.

According to HLIB Research analyst Chye Wen Fei, the research firm maintains its CPO price assumption of RM2,700/metric tonne for 2020-2022.

"YTD (year-to-date), CPO price averaged at RM3,828/mt. We anticipate CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will result in more balanced demand-supply dynamics," added Chye.

Of the eight companies which reported their quarterly results in February, six exceeded HLIB Research's expectations while the remaining two came in within its expectations, noted Chye.

The six companies which performed above expectations were FGV Holdings Bhd, Hap Seng Plantations, IJM Plantations, Kuala Lumpur Kepong Bhd (KLK), Sime Darby Plantation Bhd and TSH Resources.

Meanwhile, the two that came in within expectations were Genting Plantations Bhd and IOI Corp Bhd.

Shares of FGV fell one sen or 0.76% to RM1.31, KLK slipped four sen or 0.17% to RM23.18, Sime Darby Plantation was down five sen or 1.01% to RM4.90, Genting Plantations fell one sen or 0.11% to RM9.36 and IOI Corp skidded two sen or 0.47% to RM4.26.

"On a q-o-q (quarter-on-quarter) basis, companies with higher exposure in Malaysia operations (particularly FGV, IOI and Sime) clocked in lower FFB (fresh fruit bunch) output in 4Q20, due mainly to labour shortfall (resulted from Covid-19 pandemic, which restricted the entry of foreign labour into the country)," said Chye.

Moving forward, Chye believes labour shortage issues in Malaysia will persist into the first half of 2021, and this will continue to drag planters with higher upstream exposure in Malaysia operations.

"During the quarter, most integrated players under our coverage (namely IOI, KLK and Sime) saw their downstream margins improving on a q-o-q basis, and this was due mainly to improving demand sentiment for downstream products (particularly, in European markets).

"Genting Plantations, on the other hand, saw its downstream earnings contract further in 4Q20 (on a q-o-q basis), due mainly to weak demand for biodiesel products," Chye added.