The investment case for the plantation sector is no longer earnings recovery but earning resilience especially when concerns over high inflation and weakening economy are clouding the market. – AFP photo

KUCHING (June 24): Analysts believe that it might be too early to turn bearish on the plantation sector as crop recovery remains uncertain at this juncture but the sector’s earnings look set to stay healthy.

The research team at Kenanga Investment Bank Bhd (Kenanga Research) yesterday opined: “The investment case for the plantation sector is no longer earnings recovery but earning resilience especially when concerns over high inflation and weakening economy are clouding the market.”

It further explained that the plantation earnings look set to stay healthy on resilient demand for palm oil.

“Robust margins are also expected on firm price outlook despite rising cost. The sector’s defensive asset-rich NTA is another attraction and valuations are not excessive either.

“For investors bench-marked against the syariah index, the sector is also unavoidable as the plantation sector accounts for 9.6 per cent by weight in the FBM Shariah Index (and 9.4 per cent in the FBM KLCI).

“More importantly, we are upgrading the sector from ‘neutral’ to ‘outperform’ following recent market sell-down which has made the sector even more attractive considering the sector’s defensive business and asset base,” it added.

Looking into the upcoming second quarter of 2022 (2Q22) earnings seasons, Kenanga Research expected another good set of plantation earnings before earnings moderate after the second half of the year (2H) on softer CPO price outlook.

“Nevertheless, we expect CPO prices to stay firm, averaging at RM4,500 per metric tonne (MT) in 2022 and RM4,000 per MT in 2023 against production cost of between RM2,000 to 2,500 per MT; hence, margins are attractive,” it added.

Meanwhile, the research team at Hong Leong Investment Bank Bhd (HLIB Research) said it believed it is still too early to turn bearish on plantation sector, as crop recovery remains uncertain at this juncture, as palm output recovery in Malaysia may disappoint, and La Niña may return for a third year in a row by September to October 2022.

“This, if happens, will likely affect palm production in Malaysia and Indonesia and upcoming soybean planting in South America (in particular, Brazil),” it said.

It pointed out that the onset of La Niña (if it develops in September or October 2022) will likely affect palm production (as it coincides with seasonal pick-up in palm production cycle), and upcoming soybean planting in South America (in particular, Brazil, which accounted for about 36 per cent of the world’s total soybean output in 2021), as it coincides with soybean planting season in Brazil.

“Impact on production aside, we note that prices of CPO and soybean tends to strengthen as La Niña (as well as El Niño) sets in and weaken when the weather anomaly subsides,” it said.

“We note that CPO price discount to soybean oil has recently widened to US$400 per MT. This will likely spur buying interests, particularly when the wide price gap between the two sustain for a longer period, and inventory levels remain low among key consuming countries,” it added.

All in, HLIB Research maintained its ‘overweight’ rating on the stock, supported by its expectation of CPO price, which will likely remain lofty, more palatable valuation (following recent share price correction), and easing ESG concerns.