Maybank KE 'positive' on Malaysian plantation sector in 2022; UOBKH and RHB expect elevated CPO prices to moderate

INVESTORS should stay "positive" on the Malaysian plantation sector with crude palm oil (CPO) prices off to a good start in 2022, Maybank Kim Eng (Maybank KE) said on Tuesday (Jan 11), though UOB Kay Hian (UOBKH) and RHB projected a more tepid outlook for the industry on expectations of a downtrend in current elevated CPO prices.

In a report on Tuesday (Jan 11), Maybank KE maintained a "positive" rating for the sector, citing the low carry forward stockpile last year into 2022 as a boon for spot prices, alongside weather risks in the region and in South America.

High fertiliser prices, disrupted fertiliser supplies and labour shortage in Malaysia are also possible factors for palm oil yields to come in below expectation again in 2022, the brokerage said. It cited its preferred buys as Kuala Lumpur Kepong, Sarawak Oil Palms and Boustead Plant.

With the recent fall in soybean crop ratings for Brazil and Argentina due to unfavourable weather, the brokerage believes the outlook for South America is "not rosy" at the moment. Coupled with disruptions to Malaysian oil palm operations due to heavy rainfall, Maybank KE believes these pose "upside risks" to its CPO average selling price (ASP) forecast of RM3,200/tonne, it said.

On the other hand, UOBKH and RHB maintained an "underweight" rating for the plantation sector as they predict that current elevated CPO prices are set to moderate on the back of lower earnings growth and "dampened" valuations by environmental, social and governance (ESG) risks.

According to RHB, Malaysia's CPO output in December saw a drop of 11.3 per cent month-on-month, while its stocks decreased 12.9 per cent to 1.58 million tonnes, likely due to the impact from the recent heavy floods. While it believes that the impact of floods is not expected to be significant, it said that CPO prices have reacted positively, rising 13 per cent in the last 3 weeks.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

"We maintain our 'underweight' sector rating as we continue to expect the disconnect between CPO and share prices to remain due to ESG concerns," said RHB. It expects CPO output in Malaysia to stage a recovery to close to 19 million tonnes in 2022, with a moderation in CPO prices in H2 2022.

RHB's top stock picks within the sector are Wilmar International, PP London Sumatra Indonesia and Sime Darby Plantation, while its top "sell" recommendations include FGV Holdings and Genting Plantations.

Meanwhile, UOBKH said Malaysia's 2021 total production at 18.1 million tonnes fell within their expectations, despite the heavy rainfall and severe floods across various regions.

"This is mainly due to the readiness of plantation companies when it comes to a flood situation where most of them are well prepared with good drainage systems and the skillsets to handle such situations, such as harvesting and evacuating fresh fruit bunches," it observed.

The brokerage's CPO price assumptions for 2022 is RM3,800/tonne and RM3,000/tonne for 2023. In its view, CPO prices will sustain at these levels in Q1 2022 due to short-term supply tightness.

The brokerage added that investors with an "appetite for good dividend yield" may consider to hold companies producing decent dividend yields at about 8 per cent.

Such companies include Kim Loong Resources, Hap Seng Plantations, Sarawak Oil Palms and Kuala Lumpur Kepong, UOBKH said. It has also identified Hap Seng Plantations as its top pick for the sector.

READ MORE:

• Malaysia's palm oil sector under pressure amid operational disruptions, yield losses from floods

• Malaysian companies fear heavy losses from floods

• Indonesia sees palm oil output up by 2.6% in 2022