Kenanga more positive on plantations, cites potential CPO price rally

PETALING JAYA: Kenanga Research is now more positive on the plant-ation sector for the first quarter of the year (Q1 2019) due to potential sharp recovery in crude palm oil (CPO) prices.

It expects CPO prices to improve to RM2,300-2,400 per metric ton (MT) by the end of Q1 2019, and edge up further to RM2,500-2,600 per MT in Q2 2019 as stockpiles continue diminishing amid low production season, before retracing to RM2,200-2,300 per MT in second half of 2019 when output picks up again.

Overall, Kenanga Research anticipates 2019 CPO price at an average of RM2,400 per MT, representing a year-on-year increase of 7%.

This is indirectly supported by China resuming purchases of US soybeans on a large scale given the high correlation between soybean and CPO prices.

Malaysia’s CPO futures for January gained RM25 to RM2,095 per MT today.

The research house believes there will be a notable pick-up in demand in Q1 2019 coming from China, due to higher festive consumption during Chinese New Year, as well as from India, as import duty is set to be revised downwards from 44% to 40%, effective Jan 1, 2019.

Additionally, it said the recent developments in Indonesia could create opportunity for Malaysian planters, noting that Indonesia’s extension of 20% biodiesel blending (B20) mandate to the non-public sector obligation has started in Sept 1, 2018.

Meanwhile, CPO stockpiles are expected to fall locally and in Indonesia in the coming months as production slows down seasonally.

Nevertheless, Kenanga Research cautioned that February’s results season could be a hurdle, as lower CPO prices could likely overshadow production pick-up in Q4 2018.

Overall, it is maintaining a “neutral” call on the plantation sector with the possibility of upgrading to “overweight” if the catalysts take form including the easing trade tensions between the US and China, higher exports of Indonesian CPO to the EU and falling stockpiles in both Malaysia and Indonesia.

“Within our coverage, we prefer bashed-down names like CB Industrial Product Holding Bhd (CBIP) given sizable orderbook replenishment expected in Q1 2019 and the stock trades at an attractive FY19 price-earnings ratio (PER) of 7.7 times, and Hap Seng Plantations Holdings Bhd as share price appears overly punished, below price-to-book value mean.

“We also favour Genting Plantations Bhd for its above-average fresh fruit bunches outlook and stable earnings contribution from Johor Premium Outlet and Genting Highlands Premium Outlet, while the stock trades at an undemanding FY19 PER of 19.3 times,” it added.

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