The surge in CPO price (>70% since mid-May 2020) was not entirely reflected in KLPLN which rose by a smaller magnitude of <20% during the same period). We note that certain plantation companies under our coverage are still trading at notably lower than their share prices in early Jan-2020 (in particular, the midsized upstream players such as Hap Seng Plantations, IJM Plantations and TSH Resources). In our view, mid-sized upstream players will likely see better share price performances in near term, supported by (i) decent valuations (despite having factored in a much lower CPO price assumption of RM2,700/tonne for 2021-2022, we note that they are trading at FY21-22 P/E of <20x), and (ii) strong earnings in coming results season. We maintain our CPO price projection of RM2,700/tonne (for 2021-2022) and Neutral stance on the sector. Our top picks are HSP (BUY: TP: RM2.17), IJMP (BUY: RM2.29) and TSH BUY: RM1.38).

Decoupling between equity and CPO prices. CPO price has surged by >70% from its low of RM2,022/tonne in mid-May 2020, due to concerns on edible oil supply tightness (arising from La Nina phenomenon and labour shortfall in Malaysia) and aggressive restocking activities (particularly among the major edible oil consuming countries, as a result of low stockpile level). However, the surge in CPO price was not entirely reflected in KL Plantation Index (which only increased by a much smaller magnitude of <20% during the same period, see Figure #1).

The decoupling between share prices of plantation companies and CPO price, in our view, could be due to several reasons including: (i) investors’ concern on CPO sustaining at high level over the longer term (particularly, when output eventually recovers), (ii) high valuation of listed planters in Malaysia vs. their neighbouring peers, and (iii) investors’ growing emphasis on environmental, social and governance (ESG), which may have resulted in them shying away from the sector despite earnings prospects improving.

Zooming in on share price performance of plantation companies under HLIB’s coverage… Despite share prices of plantation companies under our coverage have recovered since 18 Mar 2020 (when KLCI was at its low, due to the MCO), we note that certain plantation companies (in particular, the mid-sized upstream players such as Hap Seng Plantations, IJM Plantations and TSH Resources) are still trading at notably lower than their share prices in early Jan-2020 (when CPO price was hovering at RM3,000/tonne level vis-à-vis ~RM3,500/tonne currently). In our view, mid-sized upstream players will likely see better share price performances in near term, supported by (i) decent valuations (despite having factored in a much lower CPO price assumption of RM2,700/tonne for 2021-2022, we note that mid-sized are trading at FY21-22 P/E of <20x), and (ii) strong earnings in coming results season (to note, average CPO price in 4Q20 was 22.2-35.5% higher QoQ and YoY, respectively).

Valuations of mid-sized plantation players remain decent. Despite having anticipated CPO price to weaken from 2Q 2021 onwards (given our anticipation of a recovery in palm production by end-1Q/early-2Q, which will eventually lead to weaker palm product prices), we believe CPO price will still remain at a decent level over the longer term (and we are maintaining our CPO price projection of RM2,700/tonne in 2021), as we believe output recovery will be partly offset by (i) Indonesian government’s commitment on its B30 biodiesel mandate in 2021 (which will in turn support palm oil consumption, and (ii) low edible oil stockpile among key producing countries and consuming countries. Besides, timing of production recovery of edible oils (including soybean and palm oil) taking place remains unknown (which in turn depends heavily on weather condition), and a delay in production recovery in edible oils (if it happens) will result in CPO price staying at elevated level for longer period of time. Based on our CPO price assumption of RM2,700/tonne for 2021-2022, we note that valuations of the mid-sized upstream plantation companies (such as Hap Seng Plantations, IJM Plantations, and TSH Resources) are still undemanding (at FY21-22 P/E of <20x), which in turn indicates decent upside potential.

Valuations aside, mid-sized upstream planters will likely report good numbers in upcoming results season. Based on the quarterly FFB production data we compiled (see Figure #3), mid-sized upstream plantation players will likely report better performances in the coming results season (both QoQ and YoY) due to higher FFB output and CPO selling prices (on QoQ basis) and higher CPO selling prices (which will more than mitigate lower FFB output on YoY basis).

Maintain Neutral; mid-sized upstream players preferred. We maintain our CPO price projection of RM2,700/tonne (for 2021-2022) and Neutral stance on the sector, as we believe current high CPO price will not sustain over the longer term. Among the plantation stocks under our coverage, small-to-mid cap plantation players will likely outperform the big cap players, due to their emphasis on upstream plantation segment (which tends to performs better vis-à-vis the integrated players amidst rising CPO prices). Our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.29) and TSH Resources (BUY: RM1.38).

Source: Hong Leong Investment Bank Research - 21 Jan 2021