• CPO production is expected to improve, increasing to circa 18.5m-19.15m tonnes in 2022 from 18.1m tonnes estimated for 2021.
• Ending stocks for 2022 is anticipated to close circa 1.8m-1.9m tonnes - in view of production increase whilst demand moderates.
• Demand is projected to remain supportive at 16.0-16.4m tonnes in 2022 from 15.8m tonnes estimated for 2021.
• Overweight on the sector given earnings growth estimated to remain firmly on the upside as CPO price is anticipated to stay above RM4,000/MT in the short-term before moderating in the later part of 1Q2022. Maintain avg. CPO price forecast of RM3,500/MT for 2022 and RM2,900/MT for 2023.

Rising ESG concerns puts pressure on valuations, but in certain context or scenario appear to be overplayed.

The current higher CPO price environment, which continued to rise 36% year-to-date, has not been reflected in plantation counters share prices despite earnings rising substantially. In fact, there is potential for plantation companies to record higher profits in the coming quarters. This share price underperformance is possibly due to heightened ESG concerns by local and international fund managers in constructing their portfolios as well as lack of retail investors participations in the sector. We believe plantation stocks currently deserve better attention given several stocks are carrying attractive valuations, although volatility remains due to ESG issues in the industry. The KLPLN Index is currently trading at PER of 11.1x, below its 10-year mean of 57.2x, which in our view, implies that the market has not fully accorded the growth generated by these companies on account of higher palm oil product prices realised in 2020/21 will offset the increase in operating costs incurred and lower-than-expected productions, with the exception of any ESG concerns limiting investors exposure to plantation companies.

The reopening of major economies will drive up demand, barring Omicron or any new variant causing another global lockdown.

Our base case scenario is for CPO price to continue trading above RM4,500/MT in the short-term before moderating in the later part of 1Q2022. Our bullish outlook on CPO price is a reflection of continuous concern over tight supply of palm oil from Malaysia and improve demand prospect post-Covid19 pandemic on increase awareness of food security, structural change in demand as well as greater hygiene awareness. Demand is expected to be robust once the movement restriction or lockdowns are fully lifted and HORECA sector reverts to normal. These factors mean CPO price could retain its upward trajectory, trading between RM5,300/MT-RM4,000/MT, possibly up until Feb/Mar 2022. Hence, maintain our average CPO forecast of RM3,500/MT for 2022 and RM2,900/MT for 2023.

Remain Overweight on the sector.

We remain sanguine on the earnings prospect of plantation’s companies as we believe earnings will inevitably remain exciting as CPO price stays elevated above RM4,000/MT in the short-to-medium term. The higher price will amplify the revenue and earnings growth momentum up to 1Q22 or possibly for the rest of 1H22. Nevertheless, we are cautious that high operational costs and suppressed profit margin on lower-than-expected production due to weaker yield and labour productivity on labour shortage issue would continue to be main risks to listed planters’ earnings. Maintain Overweight on plantation sector with BUY call on HAPL (RM2.36), SOP (RM4.75), TSH (TP: RM1.30), IOI (RM4.80), KLK (RM24.40), SIME Darby Plants (TP: RM5.00) and GENP (TP: RM9.00), Sarawak Plant (RM2.88), whilst HOLD recommendation on and FGV (TP: RM1.43); and non-rated for TH Plant.

Source: BIMB Securities Research - 20 Dec 2021