PublicInvest Research
Plantations - CPO Price Rally Marred by ESG Concerns
PublicInvest
Publish date: Mon, 08 Nov 2021, 10:20 AM
PublicInvest
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PUBLIC INVESTMENT BANK BERHAD (20027-W)
9th Floor, Bangunan Public Bank
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All materials published here are prepared by Public Investment Bank Berhad. For latest offers on Public Invest trading products and news, please refer to: https://www.publicinvestbank.com.my/pbswecos/default.asp
PUBLIC INVESTMENT BANK BERHAD (20027-W)
9th Floor, Bangunan Public Bank
6, Jalan Sultan Sulaiman, 50000 Kuala Lumpur
T 603 2031 3011 | F 603 2272 3704 | Dealing Line 603 2260 6718
Despite sustained rally in CPO prices over the last one year, there was little cheer for the Malaysian plantation counters as only four counters under our coverage (FGV, Sarawak Plantation, TSH and Ta Ann) delivered moderate gains YTD. CPO prices have touched an all-time high of RM5,363/mt and saw a YTD gain of more than 42% while KLCI Plantation Index slipped 3.8%. We believe the key reason for the lacklustre share price performance is likely attributed to the steep ESG discount attached to the plantation valuation. Meanwhile, we have raised our 2021-2022 CPO price targets to RM4,000 and RM3,500/mt respectively. We have also streamlined our valuations to factor in the rising ESG concerns. Maintain Neutral call on the sector.
- Three key ESG issues that have been plaguing the industry. Despite all the efforts adopted by plantation companies, we notice environmental groups continue to attack the sector on three key areas. i.e. deforestation (environmental), fire and haze (environmental) and labour (social). On the positive note, we have seen continuous efforts taken by the plantation companies to improve on the traceability of palm oil supply, labour welfare and adoption of monitoring system to safeguard the plantation estates.
- Easing concerns for foreign worker shortage. Most plantation companies have been suffering from acute harvester shortage over the last two years due to the closure of international borders during the pandemic period. On a positive note, the Ministry of Plantation Industries and Commodities has recently approved 32,000 foreign plantation workers, who have completed their Covid-19 vaccination to be brought into Malaysia in stages starting mid-Oct. We think the impact of the additional 32,000 foreign workers on the palm oil industry will be felt sometime at the end of the 1Q 2022, potentially resulting in better crop recovery, harvesting cycle and CPO yield.
- Revising up CPO price targets to RM3,500-4,000/mt. In view of the stronger-than-expected CPO price performance for the first 10 months, we revise up our 2021 CPO price forecast from RM3,200/mt to RM4,000/mt. For 2022, we raise our CPO price forecast from RM2,700/mt to RM3,500/mt. We think the current CPO price momentum would sustainable until first quarter of 2022. Thereafter, CPO prices should ease as we expect production to increase given the reprieve seen on the issue with foreign worker shortage in Malaysia.
Source: PublicInvest Research - 8 Nov 2021
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Discussions
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CPO prices expected to be lower in 2022, say market analysts (The Star - Saturday, 16 Oct 2021)
UOB Kay Hian Research maintains its “underweight” rating on the plantation sector
The research unit is keeping its CPO price forecast for 2021 and 2022 at RM3,300 and RM2,800 per tonne respectively
CPO prices may sustain at the current levels due to the continued disappointing palm oil production as yield recovery from the previous drought is taking longer than expected
It also notes that risks include rising fertiliser costs due to supply constraints. As fertiliser cost (30% of ex-mill cost) is one of the biggest components besides labour cost, the surge in fertiliser prices could lead to a cost increase of at least 15% to 20%
RHB Research also maintains its “underweight” rating on the plantation sector
It advises investors to ride the wave and look for opportunities to sell into strength, with CPO prices currently at a peak, and some strength being seen in share prices.
“The main risk to this thesis is weather abnormalitie. Share prices have, for the first time this year, started moving in tandem with CPO prices. We believe now is the time to ride the wave, and wait for a good opportunity to lock in some profits, adding that environmental, social, and governance (ESG) concerns will still impact sector valuations”
https://www.thestar.com.my/business/business-news/2021/10/16/cpo-prices-expected-to-be-lower-in-2022-say-market-analysts
What we can observe market behaviour now is most of the fund managers start to revise outlook for CPO in the upcoming season, most of experts had expected the CPO prise shall be normalised in tandem.
Fund managers strongly believe that plantation companies shall be adjusted lower heading Trailing Twelve Months (TTM), that’s why most of the research houses given underweight outlook.
This is the reason why plantation sector not so fancy like year 2020 glove sector, fund managers strongly believe that once the CPO price normalise so ASP also simultaneously adjusted lower.
One of the good example to review is glove sector, what happen for the year 2020 compare with year 2021. Once most of the fund managers revise neutral or underweight outlook, we all can see the respective sector (or respective stocks) will start decelerating.
Despite glove sector still handsomely profitable for the next few years but most of the share traders more bias to ASP will be adjusted accordingly. This scenario is same with plantation sector as well.
If we want to enjoy fancy profit from the share price margin at this moment, we need to thoroughly consider is it the right time to challenge current circumstances since market had given cognitive lesson for the past of glove sector.
If we want to enjoy dividend yield (only selective planters), it’s fine to accumulate rather than putting your funds at the banks but now not aware current share price is it wisely to enter since plantation sector bias to neutral or underweight.
2021-11-08 11:04
What analysts write are reports for us to value the companies. One thing for sure market is much forward looking than analysts. Market value the price of a stock based on many things with profits, PE and future growth story. I believe the market will increase the stock valuation of plantation companies in next few months. One thing we must agreed is the land area is one thing that cannot increase y itself. With the initiative of governments to stop openning of new land to cultivate palm oil, the price CPO will increase. The number of people in the Earth is increasing thus require more resources for their daily consumption.
2021-11-08 11:06
Nothing new from the IBs. If a company sell all forward CPO from Jan 22 contract to Jun 22, the average CPO price for the 1st half also hit 4400 m/t la.
2021-11-08 12:24
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novice2020
Environmental groups (Possibly IB's fund managers in disguised) can continue to attack Plantation companies with ESG, what the companies can do is to continue with their constructive works. Sooner or later, the truths will prevail. Good will triumph over evil!
2021-11-08 10:42