Public Invest still ‘overweight’ on plantations

PETALING JAYA: Public Invest Research is maintaining its “overweight” outlook on the plantation sector, with an average crude palm oil (CPO) price forecast of RM2,500 and RM2,600 a tonne for 2016 and 2017 respectively.
“We believe CPO price will be inching towards RM2,800 a tonne (metric ton) once inventories sink below two million tonnes by end of this month,” its analyst Chong Hoe Leong said in a report last Friday.
As at end of February, Malaysia’s palm oil inventories was lower by 6.1% month-on-month (m-o-m) to reach an eight-month low of 2.16 million tonnes, but were still higher by 25% year-on-year (y-o-y).
Chong said the stock-to-usage ratio climbed to 14.5%, from 12.9% previously, as CPO exports fell at a faster pace than inventories.
“This is 2.3% below the market consensus. The tighter stock situation has raised CPO prices by more than 37% since touching the six-year low of RM1,806 per tonne in late August.
“As CPO export duty is likely to be imposed next month, we expect steeper decline in inventories for March.”
Chong said the CPO spot price has shot up 12.6% to RM2,477 a tonne year-to-date in anticipation of supply risk concerns.
He said palm oil exports were down 15.2% m-o-m but 11.6% higher y-o-y. He added that weaker exports to China (-49.2%), India (-32.6%), Pakistan (-67.1%), the US (-13.8%) and other nations (-4.8%) were partly cushioned by stronger demand from the EU (+12.9%).
Chong said the CPO production fell 7.7% for four straight months, noting production in Peninsular Malaysia was up 2.9% m-o-m, while it was down 18% m-o-m in Sabah and Sarawak.
“As the oil palm trees are being hit by a ‘triple whammy’ (seasonal decline, El Nino (weather phenomenon) and biological tree stress), we expect production will continue to weaken in the coming months,” he said.
In the sector, PublicInvest prefers Genting Plantations Bhd, Ta Ann Holdings Bhd, TSH Resources Bhd and TDM Bhd.
On a separate note, Hong Leong Investment Bank (HLIB) Research maintains its “neutral” outlook on the plantation sector with an unchanged CPO price forecast of RM2,400 a tonne this year.
Going into March 16, HLIB Research expects CPO production to pick up m-o-m due to more harvesting days, but lower y-o-y due to the lagged impact from El Nino especially in Sabah.
“Based on our understanding, Sabah is still experiencing dry weather. This could further affect production in Sabah that has been suffering prolonged dry weather since 1H15,” it added.
HLIB Research’s top pick for the sector is CB Industrial Product Holding Bhd, with a target price of RM2.30.