UOB Kay Hian Research’s Leow Huey Chuen and Jacquelyn Yow are of the view that investors should maintain “market weight” on the plantation sector.
In a June 17 report, they base it on views from Dorab Mistry from Godrej International, who shared his outlook on vegetable oil prices
The analysts note that there were “three ‘B-factors’ supporting soybean oil (SBO) prices - Biden, biodiesel and biofuels.”
They think that with US President Joe Biden's green fuel push, SBO prices are likely to remain elevated.
Despite rumours of possible relief for fossil fuel refiners, Dorab believes this is unlikely to happen as Biden is a strong believer in green energy.
The Environmental Protection Agency (EPA) may release a proposal on biodiesel blending volume by end-July 2021 and the US government should make a decision by Nov 2021.
The analysts say besides the mandated volume, other factors that would impact SBO prices include mandated production volume, as well as waivers given to oil refiners for complying with the mandated blending volume. “We expect these to continue to affect vegetable oil price movements in 2HFY2021,” they add.
UOB KH also expects CPOs price to rebound quickly, with RM200-RM250 ($64.49-$80.62) per metric ton of upside, mainly supported by soybean oil prices and better demand
from India due to an improvement in the Covid-19 situation.
See also: UOB Kay Hian adds Sea Limited, CDG to its alpha picks portfolio; removes Singtel
They caution that there might be some downside in August or September 2021 once crude Palm oil (CPO) production starts to pick up, especially from Indonesia. The downside could be mitigated if Malaysia’s production fails to recover due to the severe labour shortage.
Referring to the sharp drop in CPO prices over the weekend, the analysts called it “overdone”, with Dorab saying it was mainly driven by rumours and expectations of an anticipated increase in palm oil production, potential weak palm oil exports in Jun 2021, and rumours of US biodiesel mandate changes.
In their report, the analysts also listed some bull factors that will continue to support palm oil price, including the improving Covid-19 situation in India, as well as on expectations that China is expected to be the largest importer of soybean and palm oil due to food security concerns.
For more stories about where the money flows, click here for our Capital section
On the flip side, some bear factors included a good production run by Indonesia and a bumper sun seed crop from Ukraine and Russia, which will be harvested in August or September 2021. They think some palm oil market share might be lost due to lower sunflower oil (SFO) prices.
“For investors that seek exposure to this sector, our picks are Hap Seng Plantations, Sarawak Oil Palms, Kim Loong Resources, Kuala Lumpur Kepong, First Resources, Astra Agro Lestari and Tunas Baru Lampung.” the analysts say, giving ‘buy’ ratings to all their top picks.
