RHB Group Research analysts Hoe Lee Leng and Christopher Andre Benas are maintaining their ‘neutral’ rating for the plantation sector as they believe crude palm oil (CPO) prices may potentially decline following improving CPO output in the future.
“We believe prices have already peaked at above RM4,000 ($1,296.86) per tonne, and the risk for prices is now on the downside,” they write in an April 13 research note.
But the analysts note that the price moderation should only kick in from late 2Q2021 as productivity picks up, given the current low stock levels and the low output season.
Hoe and Bernas continue to advocate buying "Malaysian-centric names", as well as companies with downstream exposure in Indonesia that will be able to benefit from the current tax structure.
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To that end, Wilmar International remains amongst its top picks for the sector, with a ‘buy’ rating for the counter and a target price of $6.30.
Hoe and Bernas anticipate production to rise in the coming months heading into peak season. They note that Malaysia's CPO output for March was up 28.4% m-o-m on the back of growth from all regions, led by Peninsular Malaysia (+31.3%), Sabah (+29.9%) and Sarawak (+19.9%).
The higher output, along with CPO’s attractive discounts to soybean oil (SBO), drove exports to rise 31.8% m-o-m in March. Major m-o-m increases came from India (+42%) and Netherlands (+55%), which were slightly offset by decreases from China (-13%) and Sri Lanka (-48%).
Hoe and Bernas note that inventory levels rose 10.7% m-o-m to 1.4 million in March. Annualised stock/usage ratio increased to 7.1%, but was still below the 15-year historical mean of 9.8%.
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Looking ahead, the analysts expect CPO price movent will no longer mirror SBO due to continued supply tightness for soybean, noting that soybean prices continue to trade at a premium to CPO of US$199 ($266.92) per tonne (from US$180 per tonne last month).
The analysts also expect imports from China and India to improve in the coming months given low levels of CPO stock. China’s CPO stock levels fell 26% m-o-m and 38% y-o-y in March, while India’s CPO stock levels fell 33% m-o-m and 60% y-o-y.
As at 3.49pm, shares in Wilmar are up 7 cents or 1.3% higher at $5.47.
