In its latest sector update research on Plantation, RHB Research takes the view that investors should adopt a profit-taking strategy – given the continued uncertainty on Indonesia’s Domestic Market Obligation (DMO) policy impact, and with the recent change in tax structure which is punishing for companies that want to get an exemption.
The research house has downgraded three recommendations during the recent quarter’s reporting season. While it maintains our NEUTRAL sector weighting.
The 1Q22 reporting season saw most planters booking results that beat expectations on the leveraged impact of higher CPO prices, with eight stocks above, one in line with, and five below expectations.
Production trends in Malaysia and Indonesia varied in 1Q22, with Malaysia’s output in 1Q22 rising 3.9% YoY, but falling 21% QoQ. For the Malaysian companies under coverage, however, FFB output is seen as falling 3.5% YoY. In Indonesia, official numbers reported a CPO output rise of 9.5% YoY in 1Q22 and drop of 7% QoQ. However, the research house saw a mix of output trends from the companies it covers, with most posting double-digit YoY declines, while others posted flattish or double-digit growth in 1Q22, due to different weather patterns in different areas. Most planters in Malaysia are expecting production to recover further in 2H22, by a mid-to-high single-digit growth. Conversely, in Indonesia, most planters are expecting mid-single-digit growth, due to the high base effect in 2021.
Forward-selling activities picking up for 2H22. Despite average spot CPO prices of c.MYR6,183/tonne in 1Q22, most planters were unable to realise this, due to their exposure to Indonesia and some forward-selling activities. While the research house saw a less aggressive forward-selling stance in 4Q21, there has been a pick-up in forward-selling activities for the rest of 2022, as planters are nervous about the sustainability of high prices and the impact Indonesian trade policies will have on prices.
Malaysia’s CPO output was flattish (-0.1% YoY) in May, while stocks dropped 7.4% to 1.52m tonnes, due to a 26.7% MoM rise in exports due to the Indonesian export ban. Despite the lifting of this ban at end-May, we believe exports from Malaysia would not fall too significantly in June, given the logistics issues faced in Indonesia currently, as well as the difficulty in obtaining export permits. Stock levels could, therefore, remain low in June, and only pick up from July onwards.
The research house maintains NEUTRAL on sector, adopt a profit-taking approach. With the lifting of the Indonesia export ban, CPO prices and share prices of planters fell. Given the continued uncertainty on the DMO policy impact in Indonesia. In addition, the special USD200/tonne tax to get a DMO exemption would be punishing for players in Indonesia that are finding it difficult to obtain the necessary export permits to export their products.
In 1Q22, the research house cuts its calls on Ta Ann and PP London Sumatra Indonesia to NEUTRAL (from Buy), and on Genting Plantations to SELL (from Neutral). The research house now have four BUYs, nine NEUTRALs, and one SELL call.
Top BUYs Target Price
Kuala Lumpur Kepong (KLK MK) MYR34.15
Sarawak Oil Palms (SOP MK) MYR7.25
Bumitama Agri (BAL SP) SGD0.95
Wilmar (WIL SP) SGD5.10
Top SELL Target Price
Genting Plantations (GENP MK) MYR7.35
