Plantation sector

Recovery in demand complements resumption in production

• Crude palm oil prices has surged above the RM2,400 per tonne level; the highest in three months on prospects of improving demand amid the lower stocks from major importers like China and India. The latter will import 1.1m tonnes of vegetable oil in June 2020 and aims to boost the figure to 1.3m tonnes from July 2020.

• We see demand to be boosted by the government’s effort under PENJANA to implement 100.0% exemption on export duty on crude palm oil, crude palm kernel oil and processed palm kernel oil from 1st July 2020 to 31st December 2020. Resumption of work activities since CMCO may also ensure sufficient supplies to meet the improving demand.

Trading Catalyst

• TSH Resources plantation operations spans across approximately 50,000-ha. in planted areas across Sabah as well as parts of Kalimantan and Sumatra, Indonesia. Moving forward, approximately 65,000-ha. of unplanted areas will anchor growth in subsequent years. In compliance to the Round Table Sustainable Palm Oil (RSPO), the group is carrying out replanting of 4,000-5,000-ha. per annum.

Technical Outlook

• TSH has been gradually forming the higher high and higher low formations since bottoming out in mid-March 2020. The recovery, however, has hit a speed bump at around the EMA120 level before price staging a pullback. For now, we may anticipate a potential short-term breakout above RM0.865, targeting the next resistance of RM0.93-RM1.00, with long term target at RM1.10. Support is pegged at around RM0.80, while cut loss is set at RM0.795.

Trading Catalyst

• As of end-2019, Sarawak Oil Palms (SOP) has a total of 79,872-ha of mature oil palms, representing 91.2% of total planted area, all located within Sarawak. Recall in 1QFY20, net profit surged 752.7% YoY to RM71.2m boosted by fair value gain on derivatives, higher palm oil product prices and decline in cost of sales that offset the lower revenue. We like SOP as one of the plantation proxies against the sector peers with forward P/E trading at 16.1x and 12.8x vs. the sector average 41.4x and 31.7x for FY20 and FY21 respectively.

Technical Outlook

• SOP has delivered a solid performance following the consolidation breakout above RM2.65 in mid-May 2020. Price subsequently rallied before staging a pullback and formed short-term consolidation between RM2.90-RM3.16. With the uptrend formation established in recent days, price has formed a bullish engulfing candle to close above all its moving average lines. A breakout above the upper band of the consolidation may see price rising towards RM3.44-RM3.70, with long term target at RM4.22. Support is located at around RM2.91 level, while cut loss point is pegged at RM2.90.

Source: Mplus Research - 22 Jun 2020