Kenanga Research has made a” Market Perform” call for Sime Darby Plantation with a Trading Price of RM5.25.
It said that its geographical spread is both a strength and weakness – strength in terms of risk diversification and exposure to wider openings but the scale and complexity of such an operation can be challenging if not sometimes complex.
The research house said that the Group offers defensive qualities such as a land-rich balance sheet and decent gearing and is a beneficiary of food inflation as edible oils and fats prices have risen substantially compared to a year ago.
It said that a larger-than-expected dividend payout cannot be ruled out either for FY22. However, above-average operating costs, weak ROEs, and the “forced labour” issue raised by the US Customs and Border Protection agency, are some of the concerns preventing a stronger recommendation and higher target price for a group so prominent in the plantation sector.
On the outlook, the stockbroking firm said that it was expecting the supply of the world’s leading vegetable oils, palm and soyabean, to pick up seasonally in the 2H of CY22.
This, it said in turn should exert some downward pressures on prices. However, palm oil prices are likely to stay relatively firm on the back of several supportive factors such as the worldwide edible oils and fats market being tight.
It said that despite prospects of improving palm and soyabean oil supply in the 2H of CY22 and some demand destruction, meaningful replenishment of present low inventories is more likely in CY23.
The stockbroking firm said that Inventories of sizeable palm oil users such as China along with possibly India and Pakistan are believed to be low. Moreover, China has yet to fully reopen its economy due to Covid-19, hence there is an opportunity for demand to pick up. “ Current high oil and gas prices suggest that demand for biofuels is likely to rise, helping to absorb supply and cushion any sharp fall in edible oils price,” Kenanga Research said.
