RHB Group Research analyst Hoe Lee Leng maintains “underweight” on the plantation sector, as she expects the disconnect between crude palm oil (CPO) and share prices to remain due to environmental, social and governance (ESG) concerns.
She kept a "buy" call for Wilmar International and a “neutral” call for the remaining three Singapore-listed stocks covered.
In a Feb 11 note, Hoe says January production dropped 13.5% m-o-m, but rose 11.3% y-o-y. The m-o-m decline came from Sarawak at 20%, West Malaysia at 12.4% and Sabah at 10.1%.
The y-o-y increase, on the other hand, came from Sabah at 29.8% and West Malaysia at 9.8%. This is offset by Sarawak with a 2.9% decline.
Exports fell by a larger 18.7% m-o-m, while y-o-y exports rose 22.2% y-o-y. The major m-o-m drop came from China at 48.9%, India at 41.4% and the EU at 26.2%.
Inventory levels dropped 3.9% m-o-m to 1.55 million tonnes in January. The annualised stock to usage ratio dropped to 8.1% — below 15-year historical averages of 10%, notes Hoe.
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“Coupled with labour shortage issues, we expect the stock levels to remain low in 1Q22, due to the low output season,” she adds.
Reflecting lower Malaysian imports, China’s palm oil (PO) stock levels dropped 29% m-o-m in January. While PO stocks are now 36% below historical averages, China’s soybean oil (SBO) stock levels have improved 4% m-o-m but are still at 29% below historical levels.
India’s stock levels rose last month despite lower Malaysian exports. This is likely due to higher imports of refined oils from Indonesia in January, given the tax rates which make its refined oils more competitive versus Malaysia, says Hoe.
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Meanwhile, soybean prices have risen about 15% in the last three weeks and 30% in the last three months due to La Niña affecting the South American soybean crop, particularly in Brazil and Paraguay. Hoe highlights that Oil World has cut soybean output estimates for South America by 11% to 184.9 million tonnes, while the US Department of Agriculture cut estimates by 4.5%.
Soybean should remain in tight supply, with stock to usage ratios falling to 24.7% in 2022 versus previous forecasts of an increase to 27.9%. However, Hoe adds that La Niña is nearing its peak, with climate models suggesting a return to neutral conditions in March to April.
With the rise in soybean prices, CPO is now back to trading at an US$80 per tonne discount to SBO, albeit still below normal discounts of US$100 to US$150 per tonne.
Hoe’s target price for Wilmar, First Resources, Bumitama Agri and Golden Agri are $5.05, $1.60, 56 cents and 26 cents respectively.
As at 2.17pm, shares in Wilmar, First Resources, Bumitama Agri and Golden Agri are trading at $4.45, $1.65, 59 cents and 27.5 cents respectively on Feb 11.
Photo: Bloomberg
