RHB Securities may downgraded the regional palm oil sector to “underweight” rating from “neutral” previously, owing to increasing environment, social and governance (ESG) concerns.
And as a result, the brokerage has lowered its valuation targets and ESG scores for palm oil companies across the board and within its coverage.
But RHB continues to favour one palm oil company: First Resources.
According to RHB, shares of palm oil companies have “retreated even further” despite crude palm oil (CPO) prices having breached the RM4,000 level lately.
The reason, it says, is due to investors becoming more “ESG-aware” and starting to price this into their investment decisions.
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As more and more scrutiny is piled upon the palm oil sector, share prices and valuations will get dragged along with it, warns RHB.
“The negative news flow on the ESG front is likely to hamper any price recovery for the sector, and things may get worse before they get better, in our opinion,” RHB analysts Hoe Lee Leng and Sean Chew write in a note dated July 30.
Nevertheless, RHB has maintained its “buy” rating for First Resources with a lower target price of $1.50 from $1.60 previously.
The brokerage believes the company remains relatively undervalued as it is trading at a single-digit times its FY2022 earnings forecast.
“We continue to highlight that in the current export tax and levy scenarios in Indonesia, integrated Indonesian planters like [First Resources] would stand to benefit more,” the RHB Singapore research team says in a July 30 report.
On the other hand, RHB has kept its “neutral” rating for Bumitama Agri with a lower target price of 45 cents from 50 cents previously.
The brokerage points out that the company’s share price had undergone a correction in the last few months, and it is already trading at two standard deviations from its five-year mean.
“As such, we believe valuations are fair at current levels, with downside risks being limited,” says the RHB Singapore research team.
Meanwhile, RHB has downgraded Golden Agri-Resources to “neutral” call from “trading buy” previously, with a lower target price of 22 cents from 30 cents.
Although the company is trading at a single digit price earnings ratio, the brokerage believes its close correlation with and high sensitivity to CPO prices are likely to hamper its share price performance in the medium term.
“Golden Agri is now trading at slightly above one standard deviation from its five-year mean – which we deem as fair,” says the RHB Singapore research team.
As at 2.50 pm, First Resources was down 1 cent or 0.7% at $1.35 with 166,900 shares changed hands.
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Bumitama, too, was down 0.5 cent or 1.1% at 45 cents with 226,000 shares traded.
Golden Agri, however, remained flat at 23 cents with trade volume of 3.5 million shares.
