PETALING JAYA: Analysts are pegging crude palm oil (CPO) prices to stay firm between RM3,800 and RM4,000 per tonne in 2024 to 2025, which should augur well for both pure and integrated plantation companies moving forward.
Despite a surprise decline in the latest July palm oil stocks to 1.73 million tonnes, some analysts predicted inventory levels could potentially increase crossing the two-million tonne mark by November-December this year given the brewing La Nina wet weather phenomenon.
UOB Kay Hian (UOBKH) Research in a report said it maintained an “overweight” view on the plantation sector based on firm CPO prices and the recovery of by-product prices, lower cost of production supported by better oil yield per hectare and lower fertiliser prices.
In addition, strong cash flows continue to support decent yield for some of the mid-sized plantation companies.
“These (factors) have led to positive expectations for the upcoming second quarter of 2024 (2Q24) results.
“Hence, we expect the upstream companies to report better earnings year-on-year (y-o-y) and quarter-on-quarter (q-o-q),” the research house noted.
For companies with downstream exposure, it added the refining margins remain thin and competitive, which may offset the improvement from upstream.
UOBKH Research said its top picks for the sector remain IOI Corp Bhd
and Hap Seng Plantations Holdings Bhd.
For the first half of this year (1H24), the CPO spot price averaged RM4,018.30 per tonne, up 2.5% y-o-y.
“As we expect higher trading prices in 2H24, we are maintaining our CPO average selling price assumption for 2024 at RM4,200 per tonne,” said the research house.
Meanwhile, Kenanga Research in a note to clients, said it maintained a CPO price of RM3,800 per tonne for 2024 to 2025, along with a “neutral” call on the sector.
“The sector is highly defensive, trading at a price-to-book value of 1.1 times, but still missing strong compelling upside catalysts.
“Upstream costs are easing and downstream margins should be stabilising but flattish CPO prices are still likely,” it added.
Kenanga Research said planters with growth potential is its preference, namely PPB Group Bhd for its consumer agricultural and food essentials exposure in the region with a target price (TP) of RM17.50.
The research house also favours TSH Resources Bhd (TP: RM1.30) for its ongoing upstream expansion and United Malacca Bhd (TP: RM6) due to rising contributions from its maturing estates in Indonesia.
For the upcoming 2Q24 results season, RHB Research said it expects better q-o-q earnings for planters in Malaysia and Indonesia, largely recording in-line earnings .
“The fresh fruit bunch (FFB) output q-o-q has started to show positive growth, while spot CPO prices remained above RM4,000 per tonne during the quarter,” the brokerage firm said in its latest regional plantation report.
In Malaysia, FFB output under RHB Research’s coverage increased by an average 10% q-o-q, while spot CPO prices were flattish at RM4,037 per tonne.
As for y-o-y, both Malaysian and Indonesian planters should also see higher earnings in 2Q24, the brokerage noted.
“In Malaysia, y-o-y output trends were largely higher with average output for companies under our coverage lifted 6.4% y-oy in 2Q24, while CPO prices also rose 5.1% y-o-y,” it added.
RHB Research, which is “neutral” on the sector, made no changes to its CPO price assumption of RM3,900 per tonne for 2024 and RM3,900 per tonne for 2025 respectively.
Hong Leong Investment Bank Research also has a “neutral” call on the sector in the absence of notable demand catalysts.
The CPO price year-to-date has averaged at RM4,019 per tonne, it said adding that; “We maintain our 2024 to 2025 CPO price assumptions of RM4,000 and RM3,800 per tonne.”
For exposure, the research house’s top picks are IOI Corp with a TP of RM4.45 and Hap Seng Plantations at a TP of RM2.21 respectively.
