PETALING JAYA: TA Research is maintaining a “neutral” call on the plantation sector with no changes to its crude palm oil (CPO) price assumptions of RM4,000 per tonne for 2024 and RM3,800 per tonne for 2025.
The research house said in its strategy report for the second half of 2024: “We believe it would be tough to paint a bullish price outlook for CPO due to the substitution effect due to an expected rise in soybean supply.”
TA Research has also reduced its overall price-earnings ratio (PER) multiple by one to two times, since the price of CPO is anticipated to decline soon, given the rising supply and weak demand factors.
The research house also does not expect another significant price adjustment like what occurred in 2022.
Major palm oil producer Indonesia’s move to reduce palm oil export tariffs may also pose a threat to Malaysian palm oil exports, which are losing export competitiveness, the research house noted.
“If palm oil production were to maintain its robust growth momentum, this would lead to a resurgence in stockpiles, which would potentially limit the CPO price increase, in our view,” TA Research said.
To recap, most plantation companies suffered from weaker earnings year-on-year in the first quarter of 2024, with the exception of SD Guthrie Bhd, FGV Holdings Bhd
and TSH Resources Bhd, which observed increased earnings contributions from their upstream division, primarily due to higher fresh fruit bunch (FFB) output and reduced production costs.
In contrast, in the downstream division, SD Guthrie was the only company to report higher profit compared with the previous year, attributed to increased demand for Asia-Pacific bulk and differentiated refineries.
With regard FFB production, SD Guthrie, Kuala Lumpur Kepong Bhd (KLK) and Kim Loong Resources Bhd witnessed higher growth rates compared with the previous year, ranging from 3.5% to 8.5%.
Conversely, other planters experienced negative FFB production growth, ranging from 1.4% to 9.8%, it noted.
TA Research has downgraded SG Guthrie to a “hold” from a “buy” with a new target price of RM4.6 based on a 2025 PER of 21 times. Similarly, TSH Resources has been downgraded to a “hold” with a target price of RM1.22.
On the other hand, it still maintained both KLK and United Malacca Bhd at “hold” with target prices of RM22.63 and RM5.43, respectively.
The research house has maintained a “buy” call for its preferred picks in the sector – IOI Corp Bhd and Kim Loong – at target prices of RM4.17 and RM2.50, respectively.
“We are bullish on IOI due to its improving palm-oil profile and its expansion of the downstream segment to enhance its future earnings and cushion the impact of lower CPO prices on the plantation segment.
“We value the stock based on a 2025 PER of 19 times,” TA Research said.
Meanwhile, Kim Loong remains its preferred pick in the upstream segment.
“We favour Kim Loong for its robust balance sheet and net-cash position, supporting a stable dividend yield of 5%-6% annually. Our valuation of the stock is based on a 2025 PER of 16 times,” the research house said.
The key downside risks to its sector recommendation include a higher-than-expected rise in soybean production, which would likely compress prices of other edible oils in the market.
In addition, the weaker-than-expected demand in China and India, delay in global economic recovery and unfavourable government policies could also impact the demand for palm oil.
