While some positive factors are developing in the plantation sector, negative news flows have diffused negative sentiments and weighed on CPO prices, dampening near-term prospects of planters under our coverage. In addition, stockpiles have not eased as quickly as we had hoped in the January-February 2019 period, no thanks to shorter working month during CNY. However, as the negative news flows subside in coming months, we believe CPO price will return to the recovery trajectory. Over the next three months, key positive factors that we are monitoring closely are as follows: (i) easing stockpiles in both Malaysia and Indonesia, (ii) higher exports to China given its pledge to buy 50% more palm oil from Malaysia, and (iii) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia). Nevertheless, we believe these positive factors have been largely priced in with the KLPLN index staging a handsome 11% recovery from the low in December 2018. As such, we maintain our NEUTRAL stance for now as well as our 2019 CPO price target of RM2,400/MT. Currently, planters under our coverage are on average trading at -1.0SD (range: -2.0 to +0.5SD) from their respective mean PER, which is consistent with the uncertain environment but lacks comfortable margin of error for us to turn positive on the sector at this juncture. However, should the biodiesel initiatives and palm oil offtake from the Chinese pan out better than expected, we would relook our valuation basis with an upward bias. On the other hand, if the EU and the Philippines’ palm oil biodiesel ban escalates further, we are likely to downgrade our CPO price assumption. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to: (i) its above-average production outlook of +12% (vs. industry average of +5%), (ii) diversification benefits and stable income streams from its cocoa business (>30% of net profit), and (iii) it is the only pure upstream planter under our coverage that is still profitable.

Palm oil ban to be a wet blanket. While some positive factors are developing in the plantation sector, negative news flows have diffused negative sentiments and weighed on CPO prices, dampening near-term prospects of planters under our coverage. In addition, stockpiles have not eased as quickly as we had hoped in the January-February 2019 period, no thanks to shorter working month during CNY. However, as the negative news flows subside in coming months, we believe CPO price will return to the recovery trajectory. Over the next three months, key positive factors that we are monitoring closely are as follows: (i) easing stockpiles in both Malaysia and Indonesia, (ii) higher exports to China given its pledge to buy 50% more palm oil from Malaysia, and (iii) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia). Nevertheless, we believe these positive factors have been largely priced in with the KLPLN index staging a handsome 11% recovery from the low in December 2018. As such, we maintain our NEUTRAL stance for now as well as our 2019 CPO price target of RM2,400/MT. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to: (i) its above-average production outlook of +12% (vs. industry average of +5%), (ii) diversification benefits and stable income streams from its cocoa business (>30% of net profit), and (iii) it is the only pure upstream planter under our coverage that is still profitable.

Valuations do not excite. Currently, planters under our coverage are on average trading at -1.0SD (range: -2.0 to +0.5SD) from their respective mean PER, which is consistent with the uncertain environment but lacks comfortable margin of error for us to turn positive on the sector at this juncture. However, should the biodiesel initiatives and palm oil offtake from the Chinese pan out better than expected, we would relook our valuation basis with an upward bias. On the other hand, if the EU and the Philippines’ palm oil biodiesel ban escalates further, we are likely to downgrade our CPO price assumption.

Upcoming results to see rebound. We expect the upcoming results season in May to see a sequential recovery in most planters’ earnings as improvements in CPO prices likely outweighed a seasonal drop in FFB output in 1QCY19. This has also been verified by several planters under our coverage. Furthermore, from our observation of the movement of daily futures curves in the past two quarters, we believe the average CPO price realised by planters could have improved by 5-6% or more in 1QCY19 (see Exhibit 2).

Source: Kenanga Research - 3 Apr 2019