KUALA LUMPUR (April 22): Investors pricing in a larger downside risk to crude palm oil (CPO) prices, the impact of Indonesia’s high tax on refined palm oil, and environmental, social and corporate governance (ESG) concerns are the key factors keeping plantation companies’ share prices from performing in tandem with the CPO price movement.
RHB Research Institute’s analyst Hoe Lee Leng and Christopher Andre Benas said in a note today that the higher export levy, in particular, will cap CPO prices in Indonesia at RM2,700 to RM2,800 per tonne despite CPO prices, in general, rising to above RM4,000 per tonne.
According to them, the consensus view is for CPO prices to have more downside risk from hereon, with expectations for prices to moderate in the second half of 2021 (2H21) and 2022.
“For investors with a longer-term horizon of more than three months and given the evidence that share prices react more to downward movements in CPO prices than upward, this will likely keep investors from ploughing into the sector,” they said.
“This will, to a certain extent, cap share price movements,” they said.
They added that with more and more investors pricing in ESG as a core investment component, plantation stocks will be under greater scrutiny.
“Any infringements will not be taken lightly and the market will punish companies that do not comply and reward those that do,” they said.
Thus, despite their higher price assumptions and expectations that CPO prices will stay high in 2021, they stayed neutral on the plantation sector.
According to them, CPO prices rose to new historical highs of above RM4,000 per tonne at the beginning of March, with CPO futures still remaining above these levels currently.
“Given the buoyancy of prices, we are raising our CPO price assumptions for 2021 to RM3,200 per tonne (from RM2,650) and to RM2,800 per tonne (from RM2,600) for 2022.
“We continue to expect CPO prices to stay buoyant for the bulk of 2Q21, on low stock levels and a low output season, but prices should moderate more significantly from late 2Q21 onwards, as productivity improves. As such, we continue to believe the risk for prices is firmly on the downside from here,” they said.
They have also raised the earnings forecasts for the stocks under their coverage by an average of 21% for 2021. Their earnings estimates for 2022-2023 have also been tweaked up by 4% to 10%.
Kuala Lumpur Kepong Bhd (KLK) and IJM Plantations Bhd are their top picks for Malaysia planters.
At the time of writing, KLK rose 14 sen or 0.65% to RM21.66. IJM Plantations, however, slipped one sen or 0.55% to RM1.82.
