Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Wed, 19 May 2021, 5:27 PM


Malaysia Plantation - Raising Our CPO Assumptions for 2020-21E

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  • CPO prices rose to a high of RM3,100/MT in mid-Sep20 and are currently settling at c. RM2,850/MT. The rise in prices since May20 was partly attributable to lower global production of palm oil, increase in demand, increase in other vegetable oil prices and weather uncertainties.
  • We are still cautious on the CPO price outlook in 4Q20 as we enter the peak production period. Nevertheless, we do not expect prices to revert to YTD lows and thus raise our CPO ASPs assumptions for 2020-21E to RM2,500- 2,550/MT from RM2,350-2,450/MT previously.
  • Maintain Neutral on plantation sector and for exposure, we prefer Genting Plantations and Ta Ann.

CPO Prices Rose to a High of RM3,100/MT in Mid-Sep20

Palm-oil prices reached a high of RM3,100/MT in mid-September 2020, from the year-to-date low of RM2,000/MT in May 2020 and the highest level since January 2020, but now are settling lower at c. RM2,850/MT. The higher prices since May 2020 are partly attributable to the increase in demand for palm-oil products, lower global production of palm oil, an increase in other vegetable oil prices and weather uncertainties, in our view.

Still Cautious on Sustainability of CPO Prices

Overall, given that the COVID-19 pandemic is still evolving globally, uncertainties remain in the market and with concerns over a potential rise in stock levels at producing countries, we are cautious on the outlook for 4Q20. Some countries are facing more stringent lockdowns due to the 2nd wave of the COVID-19 pandemic and this could again slow down edible oil demand. We continue to caution that there could potentially be a pullback in CPO prices from the current level on expectations of strong production coming in for the next 1-3 months as we enter the peak production period. While we think that current CPO prices will unlikely to sustain, we believe the average selling prices for 2020-21E will be higher at RM2,500-2,550/MT vs. our previous assumption of RM2,350-2,450/MT (9M20 CPO ASP: RM2,545/MT).

New Earnings and TPs for Companies Under Our Coverage

Given our higher assumption of CPO prices in this report, though partially offset by lower production and higher unit production costs, we now forecast plantation companies’ 2020/21E earnings to grow by 38.2%/12.4% yoy from 29.6%/17.7% previously. We maintain our sector Neutral rating. We upgrade Genting Plantation to a BUY (from Hold) on valuation grounds. Our other BUY ratings in the sector are Ta Ann, Jaya Tiasa, IJM Plantations and Hap Seng Plantations. FGV, SD Plantation, KL Kepong and IOI Corp remain as HOLD ratings. For plantation-sector exposure, we prefer Genting Plantation and Ta Ann for their improving earnings prospects with rising FFB and CPO production and CPO prices.

Source: Affin Hwang Research - 6 Oct 2020

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