PETALING JAYA: Kenanga Research has cut its crude palm oil (CPO) price forecast for 2019-2020 to RM2,000-RM2,200 from RM2,400-RM2,200 per tonne.
This is premised on the palm-oil biodiesel ban from the European Union (EU), a potential CPO inventory pickup in the second half of the year and mounting trade war tensions depressing CPO prices.
Following the revision, the research house slashed planters’ earnings by 6-97% for FY19 and 7-79% for FY20E with pure upstream players such as IJM Plantations Bhd and Hap Seng Plantations Holdings Bhd taking bigger hits.
“We believe planters’ earnings will hit a rough patch in coming quarters with CPO prices hovering around current levels, which will likely overshadow any production pickup in the second half of 2019.”
Kenanga said while biodiesel mandates seem to be panning out well (expected to absorb 13% of CPO production in Indonesia and 4% in Malaysia), the intensifying US-China trade war tensions are likely to discourage soybean oil prices like what happened last year.
“In our opinion, this will dwarf any positive trade/demand impact on CPO and keep its prices under pressure in the near term, as the two commodities are close substitutes with their prices highly correlated (>0.90).
“Coupled with a potential inventory pickup in the second half of 2019 (to 3.0-3.5 million tonnes levels), we believe the possibility of a strong CPO price recovery in the near term can be practically ruled out, leaving 2019 an unexciting year for most planters.”
Nevertheless, it said should the Chinese and/or biodiesel demand be stronger-than-expected, resulting in falling stockpiles in the second half and a sharp recovery in CPO prices, it would review the sector call and target prices of planters under its coverage.
Kenanga downgraded the plantation sector from “neutral” to “underweight”, with only Ta Ann Holdings Bhd set to outperform due to its core net profit compound annual growth rate of 12.8% driven by improved log production, profitable status and attractive 4% dividend yield.
The research house was previously hopeful of a handsome CPO price recovery by June 2019 as stockpiles fall and demand from China picks up.
“However, despite the positives nicely falling into place, negative news flows vis-à-vis palm-oil biodiesel ban from the Europe has proven to be a major killjoy.”
“As we move closer to the second half, chances of CPO price reaching our 2019 target of RM2,400 per tonne are becoming next to zero.”