04 DEC 2019 / 19:08 H.
PETALING JAYA: The crude palm oil (CPO) price may surpass the RM2,800 per metric tonne (mt) level in the coming months due to the tightening CPO supplies in the global markets, according to PublicInvest Research.
“Following a series data collection from the plantation companies, we think that there is a potential downside risk for both Indonesian and Malaysian production in 2020,” the research house said in a report today.
It also projected that the CPO price could potentially rally up to RM2,900/mt in 1H20, but the increase may not sustain until 2H due to seasonal uptick in production.
“Therefore, we revise up our average CPO price assumption to RM2,600/mt (from RM2,400/mt previously). We also re-rate the price-to-earnings (P/E) multiple for the respective companies under our coverage to reflect the bullish sentiment in 1H 2020.”
CPO futures have surged 42.5% to the current level of RM2,760/mt since hitting a four-year low of RM1,937/mt in July.
However, AmResearch foresees lower average CPO prices of RM2,100/mt and RM2,300/mt for 2019 and 2020, respectively.
“Going forward, we believe that any increase in CPO price would be capped by weaker demand from India and China as buyers shift to cheaper vegetable oils.”
PublicInvest expects palm oil supplies to get tighter in the coming months as oil palm trees have entered the seasonal low-cycle period.
“The decline in FFB production could be more severe this round given that most of the smallholders have significantly reduced their fertiliser application in the past due to budget constraints when the CPO prices were on the downtrend.”
Smallholder plantation landbank account for 17% and 41% in Malaysia and Indonesia, respectively.
The research house said the Indonesian production might also see a downside risk due to dry weather and weaker smallholders’ contribution.
With regards to the sector’s Q3 financial results, AmResearch noted that the plantation firms had delivered a mixed bag of results.
“Those which reported better results benefited from higher FFB (fresh fruit bunches) production or improved manufacturing earnings in Q3. IJM Plantations and Genting Plantations recorded higher fertiliser and upkeep costs in Q3, which kept a lid on profitability. FGV, Sime Darby Plantation and TH Plantations were hit by asset impairments in Q3.”
PublicInvest opined that the Q4 results could be one of the strongest quarterly results seen since 2017 as CPO prices are expected to average around RM2,400/mt-2,500/mt versus average of RM1,920/mt in Q4’18.
“Mid-cap plantation stocks remain our favourite especially Sarawak Plantation, TSH and Ta Ann as valuation remain attractive at current levels.”