KUALA LUMPUR (May 11): UOB Kay Hian and CGS-CIMB have maintained their stances on the plantation sector despite rising crude palm oil (CPO) prices.

In a note today, UOB Kay Hian said it maintained its “market weight” rating despite CPO prices exceeding RM4,500 per tonne since earlier this month due to concerns over the impact of limited supply on earnings of plantation companies, coupled with demand uncertainties from Covid-19-ravaged India.

“We prefer small- to mid-sized plantation companies, such as Hap Seng Plantations Holdings Bhd, Sarawak Oil Palms Bhd and Kim Loong Resources Bhd as these companies sell their products at spot prices which have higher earnings leverage towards CPO prices.

“The May 2021 CPO cash price is RM4,800/tonne. Among the big caps, we prefer Kuala Lumpur Kepong Bhd (KLK) with its undemanding valuation as compared to others,” it said.

Meanwhile, CGS-CIMB said it believes that CPO stockpiles in Malaysia will remain low this month as resilient demand from China, coupled with typically weaker output during the fasting month, will offset any potentially weaker demand from India.

“We maintain our CPO price assumptions of RM3,200/metric ton for 2021 and RM2,800/metric ton for 2022-23. We believe CPO prices will remain elevated at the above RM3,500/metric ton mark in 2Q21 (the second quarter of 2021) and trend down more noticeably in 2H21 (the second half of 2021) on the back of a better soybean supply outlook abd seasonally stronger palm oil output in 2H21.

“We maintain our 'neutral' rating on the sector as we believe current high CPO prices will not be sustained over the longer term.

“Our top picks are IOI Corp Bhd ('buy'; target price [TP]: RM4.67), KLK ('buy'; TP: RM26.64) and IJM Plantations Bhd ('buy'; TP: RM2.31).