CPO prices to remain supported up till end-of-year, despite downtrend

UOB Kay Hian maintained its “market weight” call on the region’s plantation sector despite the current downtrend in crude palm oil (CPO) prices. The brokerage believes CPO prices would remain supported until the end of the year on the back of demand recovery and a potentially weaker-than-expected production due to current high crop losses in Indonesia and Malaysia.

The research house also prefers Malaysian palm oil companies over Indonesian, given the grim outlook of palm oil supply and prices in Indonesia.

The brokerage noted in a report on Monday (Jul 18) that palm oil prices have been in decline as Indonesia ramps up export, following its recent suspension of the export levy and record-high inventory. The Indonesia Palm Oil Association had earlier announced that its palm oil inventory level stood at 7.2 million tonnes as of May 22, exceeding its record high for two consecutive months.

While this would drive down earnings expectations for those exposed to the Indonesia market, there is still upside for some companies, especially Malaysia plantation players which stand to benefit from the high commodity prices.

Analysts from UOB Kay Hian liked IOI Corporation and Hap Seng Plantations and recommended a “buy” on both companies with a target price of $5.15 ringgit (S$1.62) and $2.80 ringgit (S$0.88) respectively. They were optimistic on IOI over its “highest exposure to Malaysia” as well as stable high refining margin as compared with other big plantation companies, while Hap Seng’s appeal lies in its high dividend yield of 7.9 per cent and its stronger-than-peers earnings. 

The research house further maintained its CPO price assumptions at $5,200 ringgit per tonne and $4,000 per tonne for 2022-23 respectively.

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Indonesia’s trade surplus beats forecast after palm oil exports resumption

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Upside factors for the sector include a higher-than-expected US green diesel demand. as well as a stronger-than-expected commodity cycle.