CPO prices may stay buoyant until 2Q22, mainly led by persistent labour shortage in Malaysia as well as sustainable robust demand coming from China and India. According to MPOB, 4QTD average CPO prices stood at RM5,202 (17% higher against 3Q21 average of RM4413), which is expected to boost SIMEPLT’s upstream business. Despite consensus’ view that CPO prices may start to trend down more noticeably by 2Q22, we do not rule out the possibility of a re-rating on CPO prices assumption in the wake of: (1) labour shortage in Malaysia is not resolved timely; (2) fertilizer prices continue to escalate and may eventually hurt CPO output; and (3) La-Nina events may strengthen in the coming months.

Undemanding valuation. Being the highest weighted palm oil company in Bursa Malaysia Plantation Index (21.8% as of 8 Dec), SIMEPLT performance was pathetic, sliding 25% YTD to RM3.76 (vs KLCI -8% YTD and BURSA Plantation Index -11.9%) yesterday, mainly driven by intensifying selling pressure from institutional fund amid lingering ESG issue. Nevertheless, we see values resurface after recent sell down, underpinned by undemanding valuation of 14.4x FY22 P/E (6%% discount against peer’s average of 15.4x) together with a decent dividend yield of 3.2% in FY22. Note that, our FY22 EPS had factored in the higher fertilizer cost (which SIMEPLT has secured most of its fertilizer requirement).

Will the positive Dec return strike continue? Since listed on the main board in 2017, SIMEPLT had achieved an average return of 8.6% in December (100% winning rate), mainly due to the possibility of year-end window dressing activities. For 2021, we believe the history would repeat due to (1) undemanding valuation; (2) majority of the outstanding shares are held by funds (Figure# 4); and (3) material YTD negative returns.

Trading near its uptrend support. Technically, SIMEPLT is trading near its uptrend channel support of RM3.67-3.80 with indicators showing uptick bias. In the wake of the higher lows pattern, a decisive breakout above RM3.86 will spur prices higher towards RM4.25-4.40 territory. Cut loss at RM3.58.

Source: Hong Leong Investment Bank Research - 9 Dec 2021