The global equity and commodity markets have been badly affected by the uncertainties surrounding the impact of Covid-19 and the crude oil price crash due to the price war between Saudi Arabia and Russia. Our CPO price assumptions were recently lowered to RM2,350-2,450/MT for 2020-21E, given our more cautious stance on demand. We are NEUTRAL on the sector with Ta Ann as our top pick.

Disruption of Global Food Demand Due to Covid-19

The impact on food demand would depend on how long this Covid-19 outbreak will last. On the one hand, China could potentially ramp up its demand for vegetable oils as the domestic situation is improving with workers slowly returning to work and businesses opening their doors again, but on the other hand, there could be a temporary slowdown in other countries that have been hit hard by the outbreak.

Biodiesel Demand Could be Affected by Low Crude Oil Prices

The recent drop in the Brent crude oil price has reduced the price competitiveness of oils & fats for biodiesel. Although CPO prices have also fallen, the price spread between palm-oil and gas oil (diesel) has widened to US$220/MT from an average of US135$/MT in Feb20, which indicates a higher subsidy is needed for biodiesel blending activities. This could reduce the attractiveness of biodiesel and production could slow down.

Palm-oil Prices Under Pressure From the External Headwinds

The global market uncertainties with the Covid-19 outbreak coupled with the oil war has taken a toll on the commodity markets, including palm oil. In a recent strategy report A financial tsunami, we had lowered our CPO price assumptions for 2020-21E by RM150/MT to RM2,350-2,450/MT, given our more cautious stance on the market outlook.

NEUTRAL on Plantation Sector

We have not made any earnings forecast changes in this report, but had downgraded our plantation sector rating to NEUTRAL from OVERWEIGHT in the mentioned strategy report, as we expect weaker demand to impact the plantation sector. We now forecast plantation companies’ 2020E earnings to grow by c.41.3% (from 53.4% previously), mainly driven by higher yoy CPO prices. In our coverage, we have BUY ratings on Ta Ann and Jaya Tiasa, HOLD ratings on IJM Plantation, Hap Seng Plantation, KL Kepong, FGV, SD Plantation and Genting Plantation, and a SELL rating on IOI Corp. For small-mid cap plantation-sector exposure, we still prefer Ta Ann for its improving earnings prospects (higher log sales volume, and stronger CPO production and ASP).

Source: Affin Hwang Research - 19 Mar 2020