KUCHING: Prospects for the plantation sector in the third quarter of 2019 (3Q19) is still expected to be dim, with crude palm oil (CPO) prices expected to remain under pressure during the period.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), while some positive factors are developing in the plantation sector, an expected rise in stockpiles in 2H19 and negative news flows have diffused negative sentiments and weighed on CPO prices, dampening near-term prospects of planters under its coverage.
“Coupled with unattractive valuations, we are maintaining our ‘underweight’ stance on the plantation sector with an unchanged 2019 CPO price target of RM2,000 per metric tonne (MT),” Kenanga Research said.
“In a nutshell, we believe the depressed CPO price environment will mask any production pickup in the second half of 2019 (2H19), leaving 2019 an unexciting year for planters.
“Nevertheless, should the Chinese and/or biodiesel demand be stronger-than-expected, resulting in falling stockpiles in 2H19 and a sharp recovery in CPO prices, we would review our sector call and target prices of planters under our coverage.”
To note, Kenanga Research had downgraded Ta Ann Holdings Bhd to ‘market perform’ from ‘outperform’ with an unchanged target price of RM2.40 per share and IJM Plantations Bhd to ‘underperform’ from ‘market perform’ with an unchanged target price of RM1.40 per share.
Kenanga Research believed planters under its coverage, especially the upstream players, will continue to undergo a rough patch in upcoming quarters with CPO prices hovering around current levels, overshadowing any production pickup in 2H19.
“Nevertheless, we still expect earnings to fall within our expectation as the negatives have already been accounted for in our latest earnings adjustments.”
Having said that, the research arm believed potential exceptions are IOI Corporation Bhd, as the group’s oleochemical margins are likely able to sustain on stable demand for specialty products and PPB Group Bhd, as soybean crush margins are likely to improve when the adverse effect of the African swine fever outbreak subsides.
“From our checks with a few local planters, we gather that there has been no weather issue in palm estates in large and hence, production is likely to pick up sturdily in 2H as per usual, from 1.5 to 1.7 million in the past few months to 1.8 to two million in 4Q19.
“On the exports front, we have already seen above-average buying for five consecutive months, thanks largely to record-high demand from India after the import levy reduction in January 2019 as well as bulky China purchases due to its pledge to up palm oil imports.
“However, the buying frenzy is likely to dissipate in 2H19 as the palm oil inventory of the two major importers build up.”
It noted that China had imported 825,000 MT in May 2019 versus 400,000 to 500,000 MT in 2H18 while India’s imports numbered at 652,000 MT in May 2019 versus 400,000 to 600,000 MT in 2H18.
Overall, the research arm expected supply to outstrip demand in 2H19, leading to burgeoning stockpiles (likely reaching 2.5 to three million MT level in 4Q19) and capping the CPO price upside.