RHB maintains its UNDERWEIGHT call on plantation stocks. The research house believes fundamentals still point to moderating prices in 2022, and advocate a profit-taking strategy. However, it highlights a risk of La Niña in 4Q21/1Q22, which could keep prices higher for longer.
While ESG discounts will still prevail – thereby dampening valuations – it sees some value in stocks that are still trading at low implied CPO prices.
Fundamentals still point to moderating prices in 2022. CPO prices remain buoyant at current levels, due mainly to the still-disappointing production numbers from Malaysia (down 9% YoY in YTD-Sept). It still maintains that prices are due for a correction, as supply and demand fundamentals are improving. It highlights that assuming weather remains normal, the stock/usage ratios for the 8 vegetable oil composite and 17 oils and fats composite is expected to rise above 30-year historical levels in 2022, on the back of improved supply from palm as well as oilseeds globally. This signifies that prices should moderate YoY in 2022.
However, it acknowledges the largest risk to this assumption is weather – as a La Niña alert has been triggered recently, with an 81% probability of it occurring over Oct 2021-Dec 2021. Historically, when La Niña alert criteria have been met, La Niña has subsequently developed around 70% of the time. Some of these models predict that a La Niña, if it emerges, could persist through to Jan-Mar 2022. Should this occur, it could have a damaging effect on crops in the Northern Hemisphere – particularly on the soybean planting season in South America, which starts in
November. This could also have a positive impact on soybean prices, which could in turn influence other vegetable oils.
Top SELLs Target Price
Genting Plantations (GENP MK) – SELL MYR6.25
FGV Holdings(FGV MK) – SELL MYR1.35
Top BUYs Target Price
Wilmar (WIL SP) – BUY SGD5.60
London Sumatra (LSIP MK) – BUY IDR1,530
Sarawak Oil Palms (SOP MK) – BUY MYR4.60
