PETALING JAYA: UOB Kay Hian Research (UOBKH Research), which is cautious on the longevity of the crude palm oil (CPO) price rally, believes there are opportunities in inexpensive planters with resilient production profiles and offer attractive dividend yields.
“We anticipate exceptional upstream performances over the fourth quarter of 2024 (4Q24) and 1Q25 in tandem with the CPO spot price upsurge, while we also flag the potential for integrated players’ downstream operations to post positive surprises due to inventory feedstock gains vis-à-vis faster-adjusting downstream product prices.
“That said, some companies have been observing weaknesses in their monthly fresh fruit bunch (FFB) production, and thus may benefit less from the CPO rally,” the research house said.
It expects plantation companies to make higher dividend payouts on the back of positive earnings momentum heading into this year and their light capital expenditure requirements.
“Notwithstanding CPO price fluctuations, we note that planters with compelling dividend narratives, such as United Plantations Bhd
, have seen their valuations rerate in recent times,” UOBKH Research said.
The research house maintained a “market weight” call on the sector with Hap Seng Plantations Holdings Bhd as its top pick.
“Hap Seng Plantations will benefit the most as it only sells in the domestic spot market and enjoys a better CPO average selling price (ASP), while maintaining a strong FFB production growth trajectory.
“As one of the most cost-efficient plantation companies, Hap Seng Plantations’ earnings before interest and tax (Ebit) margin was 31% in 2Q24, compared with the peer average of 17%. Our target price of RM2.25 is based on 11 times 2024 price earnings,” it added.
UOBKH Research pointed out that Hap Seng Plantations and Kim Loong Resources Bhd are some of the few high-yielding names with strong exposure to the current CPO price strength.
It said among the events that could impact its current key assumptions include weather risk, given the uncertainty to La Nina occurrence as well as potential severity.
“For the time being, La Nina’s supply disruption risks are also pertinent for soybean plantings in the Americas with relatively drier conditions being observed,” the research house explained.
It added that another factor would be potential trade tariff and policy changes to the US biodiesel programme following Donald Trump’s US presidential election victory, which could significantly impact the global vegetable oil markets.
Meanwhile, UOBKH Research forecast a higher CPO price of RM4,500 per tonne for 2025.
“We have raised our 2025 CPO price forecast from RM4,000 to RM4,500 as we foresee palm oil balances continuing to tighten on the rollout of Indonesia’s B40 biodiesel programme from January 2025 and subdued palm supply growth, alongside potential production shortfalls seen for other vegoils.
“While this represents a rise from our estimated 2024 CPO price of RM4,200, we see this to be driven by elevated CPO prices of about RM5,000 in 1Q25 before potentially moderating thereafter,” it added.
Similarly, RHB Research believes CPO prices are unlikely to decline to below RM4,000 per tonne in the near future as geopolitical risks remain very much in play, which would also keep crude oil prices elevated and speculative forces active.
Notwithstanding speculative activities, the research house believes fundamentals are looking more positive in 2025.
“We believe the culmination of the low output and stock levels in Indonesia in 2024, increasing biodiesel mandates in Indonesia in 2025, and tightening supplies of sunseed and rapeseed and canola in 2025, will lead to a more apparent deficit in global oils and fats in 2025.
“This will in turn lead to stronger prices for vegetable oil in 2025, with stock/usage ratio for the 17 oils and fats falling to a 15- year low of 12.4% in 2025,” RHB Research added.
It has maintained an “overweight” call for the sector as it believes with higher and more sticky prices in 2025, the sector will finally be rerated upwards.
The research house has switched its top picks to purer planters such as Johor Plantations Group Bhd, Sarawak Oil Palms Bhd and SD Guthrie Bhd.
