PETALING JAYA: Crude palm oil (CPO) is expected to regain its pricing competitiveness in the second half of 2024 (2H24) given tighter supplies and gradual return in demand resulting in higher prices.
This would be supported by lower production due to unfavourable weather conditions in 2H23 and 1Q24, along with recovering demand, as palm oil inventories in major importing countries like India and China had been trending downwards.
UOB Kay Hian (UOBKH) Research, in its 2H24 outlook report, said it has maintained the CPO price forecast for 2024 at RM4,200 per tonne.
Year-to-date, the CPO price averaging at RM4,029 per tonne is still within expectation, it added.
Additionally, short-term weather disruptions are affecting other crops, leading to lower production and shipment delays due to Red Sea tensions.
“This may continue to support CPO prices at the current level, trading in the range of RM3,800 to RM4,500 per tonne,” added UOBKH Research.
Other events to watch out for include the swing from El Nino to La Nina weather in the same year as well as record soybean harvests year after year.
Also, the macroeconomic uncertainties continue to persist, including the pace of China’s economic recovery, potential slowdown in the United States, escalating tensions in the Russia-Ukraine conflict and the impact on freight rates.
Meanwhile, based on planters’ latest 1Q24 earnings announcements, most of them reported a weaker quarter-on-quarter earnings growth mainly due to lower CPO production and sales volume, despite an improvement in CPO average selling prices (ASP).
UOBKH Research noted operating margin improved significantly from 13.8% in December 23 to 17.2% in 1Q24, thanks to lower production costs and stable CPO ASP.
“We expect sector earnings growth to remain robust at 49% y-o-y in 2024.
“This projection is underpinned by the expected expansion of margins, driven by reduced production costs (especially fertiliser prices), yield recovery and our internal forecast of a higher CPO price of RM4,200 per tonne for 2024,” it added.
On top of that, UOBKH Research has also observed higher pricing for byproducts such as palm kernel oil and palm stearin, which have improved by 23.5% and 9.4% year-to-date, respectively.
In the past two years, many plantation players have become net cash companies due to strong cash flow from high CPO prices and low capital expenditure, the brokerage firm pointed out.
“This financial strength has allowed them to raise dividend yields through higher payout ratios.
“Given their strong cash positions, plantation companies are expected to continue offering relatively high dividend yields, reflecting their financial stability and commitment to shareholder returns,”the research house noted.
UOBKH Research also said plantation companies have been providing strong dividend yields of 5% to 10% in recent years, supported by strong cash flows resulting from higher CPO prices.
Hence, the brokerage firm has maintained an overweight on the sector as “we foresee the elevated CPO prices continuing to support earnings and good dividend payout.”
While the steady earnings growth may not be as attractive relative to the thematic theme now, UOBKH Research noted this sector could be a good investment for investors looking for steady capital appreciation as CPO prices may be supported by limited production growth going forward and good dividend yield.
Its top picks within the sector are IOI Corp Bhd
with a target price (TP) of RM4.80 and Hap Seng Plantations Holdings Bhd (TP: RM2.25).
Hap Seng Plantations will benefit the most as the group only sells in the spot market and enjoys better CPO ASP, accordijng to the research house.
As one of the most cost-efficient plantation companies, Hap Seng Plantation’s earnings before income tax margin was 31% in 1Q24, compared with the peer average of 17%.
IOI Corp, meanwhile, has the highest exposure to Malaysia, as well as higher refining margins compared with other big-cap plantation companies.
“Its valuation is also cheaper at about 15 times compared with other big-cap plantation players which are trading at 20 times to 25 times,” UOBKH Research added.
