SINGAPORE (Jan 31): UOB Kay Hian is maintaining a “market weight” rating on the regional plantation sector given the lack of catalysts to drive share price performance as well as expected weak upcoming 4Q18 earnings.
In a Tuesday report, analyst Leow Huey Chuen says, “Any sell-down on weak 4Q18 results could be opportunities to accumulate companies that have good management track record, good growth potential from favourable oil palm tree age profile and high leverage to CPO price recovery.”
UOB’s top stock picks are Wilmar International, Bumitama Agri, Tunas Baru Lampung, Kim Loong Resources and IJM Plantations.
Palm oil prices have declined significantly since 2017 and is likely to see some recovery in 2019 on slow production growth. But prices are unlikely to rise significantly and will only recover gradually as palm oil inventory starts to draw down.
“Thus, we forecast crude palm oil (CPO) prices at RM2,350/tonne for 2019 (2018: RM2,232.50),” says Leow.
In 2020, CPO prices could be higher as the surplus supply is expected to be absorbed by global demand in 2019 and on slower production growth. The weakening CPO prices since 2017 have already priced in the surplus supply from two consecutive years of higher production.
This year, inventory levels are expected to fall as demand growth outstrips production growth. Global palm oil production is expected to grow 5.1% y-o-y, compared to demand growth of 8.1% y-o-y, leading to inventory drawdown and is a major factor for higher selling prices.
The slower growth would mainly be due to a slower production increase in Indonesia with palm trees likely to enter a low production year after two consecutive years of bumper crops and lesser new mature areas.
“Indonesia’s biodiesel demand is crucial. Half of the 8.1% demand growth expectation for 2019 will come from higher biodiesel demand in Indonesia,” says Leow.
Due to poor domestic oil seed production as a result of drier weather, India is expected to import more vegoil. This year, palm oil is expected to take a larger share of India’s vegetable oil imports after the latest adjustments in import duties.
Meanwhile, the recovery in prices are also dependent on other edible oils.
“High global stock-tousage ratio for the 17 major oils and fats and high oilseed stock-to-usage ratio could be a drag on palm oil price recovery,” says Leow.
However, soybean supply has changed significantly due to recent deteriorating weather conditions in Brazil. The analyst reckons that this could be a near-term supportive factor to global vegoil prices.
