SINGAPORE (Dec 23): For those looking to cash in on plantation stocks, it’s now or never.
Crude palm oil prices are on the upswing – it climbed to a high of RM 2,665 per tonne by end November due to lower palm oil inventory.
While the spike is good news for industry players, RHB Research also advises caution as the price rise is “a bit too sharp”.
“We expect to see a slight pullback before prices start picking up again in 1Q20,” says the RHB’s Singapore research team in a report released on Thursday.
“Our CPO price assumption is MYR2,400 per tonne for 2020, and we expect the commodity to trade between MYR2,200-2,800 per tonne in 2020 with 1H20 prices being stronger than 2H20.”
Despite this, the team says this development could be an upturn for Singapore-listed plantation stocks.
While the B30 biodiesel mandate in Indonesia had caused some concern among companies and investors, RHB says this is likely to “mop up any excess [CPO] supply” in the coming year.
The push for biodiesel is what analysts term the “largest demand catalyst” for the plantation sector.
“We believe Indonesia’s mandate remains achievable due to the availability of US$2 billion in the biodiesel fund,” say RHB analysts. “Based on current CPO prices, this fund should be able to subsidise 10 million tonnes of biodiesel, which makes up 125% of 2020’s mandate,” adds the team.
Apart from Indonesia, the brokerage also cites the European Union (EU) and China as the main consumers of palm-based biodiesel, with 4 million tonnes and 1.3 million tonnes respectively.
Although analysts acknowledge that EU’s palm-based biodiesel ban and China’s lack of subsidies could result in weaker demand, demand from other countries could help mitigate the impact.
“Indonesia’s and Malaysia’s mandated demand increase of 3 to 4 million tonnes will more than offset any discretionary demand disappearance,” they add.
Secondly, the brokerage notes that a CPO deficit is imminent in 2020 as demand growth outweighs that of supply. This would mean a turnaround for prices in the plantation sector.
“CPO stocks are on the way down, as production growth should slow in 2020, due to the impact of dry weather this year and fertiliser application reduction by smallholders in 2019,” says RHB analysts, adding that this could in turn buoy prices of plantation stocks.
Finally, analysts expect food demand to remain strong in 2020, particularly from China as it works to fully replenish its hog inventory following the swine-flu outbreak. The brokerage also expects China’s imports to rise 8% next year.
“This, in addition to the impact of the still-ongoing trade war making US soybeans more expensive, will keep demand relatively steady from China,” say RHB analysts.
They also favour the stable demand trends in India, which is despite recent talk about palm oil import restriction. The Indian government estimates palm oil imports to increase by some 6% in 2020.
On the back of strong upside factors and a positive industry outlook, RHB is maintaining its “overweight” stance on the plantation sector with First Resources, Bumitama Agri and Wilmar International as its top picks. Along with “buy” calls on all three stocks, RHB has target prices of $1.95, 80 cents and $4.75 for the respective stocks.
Shares in First Resources closed one cent higher, or 0.5% up, at $1.86 on Monday, while shares in Wilmar International closed four cents higher, or 1% up, at $4.12. Shares in Bumitama Agri closed one cent lower, or 1.3% down, at 76 cents.
