Despite expecting the year’s fundamentals of supply to improve with moderation in crude palm oil (CPO) prices in 2H22, RHB Group Research analyst Hoe Lee Leng says valuations will remain dampened by ESG risks.
She maintains “underweight” on the plantation sector, with a "buy" call for Wilmar International and “neutral” call for the remaining three Singapore-listed stocks covered.
Similarly, UOB Kay Hian Research analysts Leow Huey Chuen and Jacquelyn Yow have also maintained their “underweight” rating on the plantation sector as they expect earnings to contract by 24% in 2022.
“This sector is unlikely to outperform the market with the expected earnings contractions for 2022 and 2023,” the analysts add.
The average CPO price for 2021 at RM4,407 per tonne was higher than UOB Kay Hian’s estimate of RM4,200 per tonne. This was mainly supported by the tight supply and global vegetable oil rally on the back of the decarbonisation policy.
However, only a few plantation companies were able to enjoy this high price due to forward sales committed much earlier, say Leow and Yow.
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They note that the Malaysia palm oil exports were down by 10.5% y-o-y in 2021 to 15.5 million tonnes. Meanwhile, exports to India reported a growth of 31% y-o-y, mainly due to a lower base in 2020 and the lower import duty in 1H21.
“The top two export destinations — China and Europe reported a drop of 32% y-o-y and 16% y-o-y respectively due to competitive pricing from Indonesian players on refined products. In China, palm oil is also losing market share to soybean oil (SBO) in 2H21 as SBO price did not increase due to higher soybean crush in 2H21,” they add.
Total production in 2021 came in well within UOB Kay Hian’s expectation at 18.1 million, a 5.4% decline y-o-y. The low production in 2021 was mainly due to a labour shortage and unfavourable weather in 2019 and 2020, which led to a much lower oil yield of 3.1 tonnes per hectare for 2021 versus 3.33 tonnes per hectare for 2020.
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“If not for the higher oil extraction rate achieved in 2021, production could be even lower. For 2022, we are expecting palm oil production to increase by 3.3% y-o-y to 18.7 million tonnes. This production is based on our expectation of migrant workers starting to arrive in Malaysia from Jan 22 and the impact to production to be seen by 2H22,” the analysts say.
Meanwhile, RHB’s Hoe expects CPO output in Malaysia to stage a recovery to close to 19 million tonnes for 2022.
The La Niña weather phenomenon has caused disruption to soybean and palm oil production since Dec 21, UOB Kay Hian analysts note. Heavy rainfall is interrupting the harvesting and logistic processes of palm oil-producing countries.
“Although the rainfall in key oil palm states such as Sabah, Johor and Pahang is easing, a lot of after-flood maintenance needs to be done before harvesting of fresh fruit bunches can be resumed. Thus, the tight palm oil supply may persist in 1Q22. After 1Q22, production is expected to be back in its recovery mood,” say Leow and Yow.
Hoe says the impact of the recent floods is not expected to be significant. However, CPO prices have reacted positively, rising 13% in the last three weeks.
“Based on our checks with planters, we understand the floods have had a minimal insignificant impact on output, with some disruptions to harvesting lasting about one week in some West Malaysian estates,” she adds.
Soybean prices, however, have also risen by about 11% in the past three weeks due to weather concerns. This resulted in CPO returning to trade at US$14 per tonne discount to SBO from US$13 per tonne premium last month, albeit still significantly below normal discounts of US$100 to US$150 per tonne.
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Hoe’s target price for Wilmar, First Resources, Bumitama Agri and Golden Agri are $5.05, $1.60, 47 cents and 24 cents respectively.
Shares in Wilmar, First Resources, Bumitama Agri and Golden Agri closed at $4.27, $1.74, 55 cents and 24 cents respectively on Jan 11.
Photo: Bloomberg
