Plantation sector

MAYBANK RESEARCH (April 25): Indonesia’s ban on palm oil exports will worsen the tightness in global edible oil supply. But we think the ban will be a short one to two months. Prices of edible oils will remain lofty in 2Q22 to ration demand. We expect Bursa Malaysia Derivative’s Futures Crude Palm Oil to trade higher (possibly retesting recent highs) while Indonesia’s domestic crude palm oil (CPO) price will gravitate towards subsidised cooking oil price if the ban stays.

Indonesia, the world’s largest producer and exporter of palm oil, made up 31% of global exports in 2020. According to Oil World, Ukraine exported 7.2 metric tons (MT) of edible oils (mainly sunflower oils) in 2020, which accounted for 8% of global exports of 95.1MT. Ukraine ports in the Black Sea region have been closed since the Russia-Ukraine war started on Feb 24. The disrupted exports from Indonesia and Ukraine will keep global edible oil prices lofty, until such time when either the Indonesian export ban is lifted or shipment from Ukraine in the Black Sea region is allowed to resume.

Malaysia-based planters are clear winners for now. Pure Malaysian plays include Sarawak Oil Palms Bhd, Ta Ann Holdings Bhd, Boustead Plantations Bhd and Hap Seng Plantations Holdings Bhd. Among the large caps, IOI Corp Bhd has the least exposure to Indonesia. But bear in mind, this Indonesian export ban is temporary. We expect it to be lifted by end-2Q22.

When the ban is lifted, we expect Indonesia to flood the global market with its accumulated inventory. And as the industry enters into its seasonal peak output period in 2H22, this could trigger a sharp price correction. 2022 will likely be a year of two halves for CPO price. CPO spot price has averaged RM6,248/T year to date. Given the high prices and new export ban, we now raise our 2022E/2023E CPO average selling price to RM5,000/RM3,400/T (from RM4,100/RM3,200/T).

Westports Holdings Bhd

Target price: RM3.78 HOLD

CGS-CIMB RESEARCH (April 26): 1Q22 core net profit of RM152 million was 19% lower y-o-y and 21% lower q-o-q, mainly due to a huge jump in the effective tax rate to 39%, versus 24% in 1Q21, and an unusually low 16% in 4Q21. Stripping out the tax impact, 1Q22 was decent with Ebit flattish y-o-y and up 5% q-o-q. The tax burden in 1Q22 was especially heavy, partly because of the Prosperity Tax that is effective from Jan 1 to Dec 31, 2022, and because the additional deferred tax income that was accrued in 4Q21’s profit and loss is now being gradually reversed. The latter suggests that FY21F’s effective tax rate may end up being higher than our current forecast; we are waiting for further clarification from Westports on this.

Despite a 10% y-o-y fall in container volumes in 1Q22, Westports is guiding for “near identical” volumes in FY22F compared to FY21; hence, we cut our volume growth forecast from 6% to 1%. However, we think there is still downside risk to volumes if Westports’ customers do not switch back from Northport, or if China’s ongoing zero-Covid lockdowns snarl traffic for long periods.

Frontken Corp Bhd

Target price: RM3.20 BUY

HONG LEONG INVESTMENT BANK RESEARCH (April 26): Taiwan’s Plant 2 phase 1 expansion is slightly ahead of schedule and will be completed by 1H21. Although the Plant 2 land size is almost the same as Plant 1, the former’s production capacity can be more than double as new technology requires less floor space. The expansion is expected to lift FY23 core net profit by 22%.

It is also in negotiations with an original equipment manufacturer (OEM) customer (existing client in Taiwan) on a large volume-based project to support Singapore’s foundries. If this project materialises, expansion will be required and it plans to repurpose the idle space in its O&G site.

Demand projection remains strong and there has not been any order reductions so far. Frontken shared that it continues to experience price pressure despite the foundries increasing their average selling prices. Ebitda margin should increase thanks to improvement in O&G, and we are expecting O&G to achieve double-digit growth at the profit-after-tax level. We like Frontken for its multi-year growth ahead on the back of the sustainable global semiconductor market outlook, robust fab investment, leading edge technology (7 nanometer and below), and strong balance sheet (net cash of RM315 million or 20 sen per share) to support its Taiwan expansion.

Uzma Bhd

Target price: 68 sen OUTPERFORM

KENANGA RESEARCH (April 26): We returned from a small group meeting feeling positive, with management taking the opportunity to detail its diversification plans into the solar energy space. Overall, solar is expected to be the main driver of the group’s non-oil and gas business, expected to reach about RM500 million revenue in the near term by 2025. However, we do note that execution and results delivery will still be crucial.

While the solar space is expected to see huge growth potential in the coming years, especially in Malaysia, competition within the space is also stiff as it is crowded with many other competent and well-established players, with barriers to entry also relatively low. Nonetheless, we also believe that any fruition or materialisation of Uzma’s ventures into the solar space will serve as immediate re-rating catalyst. Currently, listed solar players (Solarvest Holdings Bhd, Samaiden Group Bhd, and Pekat Group Bhd) are trading at a huge valuation premium compared to Uzma. Maintain “outperform” with a target price of 68 sen — pegged to 0.5x PBV, broadly in line with its mean valuations.