RHB Research has maintained “NEUTRAL’ on Regional Plantation Sector. While the research house has stated it believes that supply constraints will remain until end-2022 – on labour issues in Malaysia and slow exports from Ukraine – this could reverse in 2023, pulling down CPO prices. ESG concerns seem to be on a backburner, but valuations should continue to be held back by it. The research house recommends adopting a trading strategy in this volatile price environment, with Top Picks being Kuala Lumpur Kepong (KLK), IOI and Wilmar.
CPO prices have fallen drastically on the unwinding impact of Indonesia’s export ban, as well as fears of recession which has brought down all commodity prices. It is believed the price decline is slightly overdone (having fallen by 44% in seven weeks), much more than the drop in soybean, crude oil and wheat prices (-31%, -17% and -16%). While regulatory risks still exist, particularly for players in Indonesia, supply concerns could continue to haunt the sector for the rest of 2022 – given the logistics backlog in Indonesia, slow exports out of Ukraine and the labour shortages in Malaysia. That said, should these issues be resolved by end-2022, 2023 should be a better year for supply, and prices would remain under pressure.
ESG concerns are still there, but may have taken a backseat. However, the ESG discounts previously assigned by the research house to valuations are still prevalent. The research house has reassessed their ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvements. It is highlighted that while better disclosure on ESG-related information has been made over the years, progress in mitigating ESG issues is rather slow. As a result, the research house has made some upward adjustments to the ESG score for some companies that have made progress but it should be highlighted that some companies have remained relatively stagnant in their ESG efforts, while some have even reduced disclosures.
CPO price assumptions revised down. It is expected that stock levels to remain tight for the next 2-3 months, possibly until end-3Q, thus providing support to CPO prices. The CPO price assumptions is revised down for 2022 to MYR5,100/tonne (from MYR5,300/tonne). For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported out, CPO prices could fall to lower levels. However, it is believed that the support from higher biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. The research house lowers its 2023 assumptions to MYR3,900/tonne (from MYR4,300). Its MYR3,500/tonne assumption for 2024 remains unchanged.
Stay NEUTRAL, with a trading strategy. With the recent share price deterioration, average P/Es of the planters under our coverage have shrunk to 10x 2023F, with the Malaysian big-caps at 14-18x, while the Malaysian mid-caps and regional planters trade at 6-11x. Although there could be more downside in 2023, as CPO prices moderate further, valuations of some planters are starting to look attractive.
The research house has upgraded IOI to BUY and cut FGV to SELL. We now have five BUYs, six NEUTRALs and three SELLs. Top Picks are integrated players – KLK, IOI and Wilmar, as they would be able to withstand the volatile price environment better.
Top BUYs – Target Price
Kuala Lumpur Kepong (KLK MK) – MYR25.75
IOI Corporation (IOI MK) – MYR4.70
Wilmar (WIL SP) – SGD 4.95
Top SELLs Target Price
Genting Plantations (GENP MK) – MYR5.80
Astra Agro Lestari (AALI IJ) – IDR7,240
