RESEARCH FIRMS MAINTAIN 'NEUTRAL' STANCE ON PLANTATION SECTOR, EXPECTS BETTER 2H 2023 EARNINGS

Research firms are maintaining a 'neutral' stance on the plantation sector given better prospects for the second half (2H) 2023 amid a likely weakening second quarter (2Q) 2023 earnings results. 

RHB in its Regional Sector Update note said Malaysia's July palm oil stocks rose 0.7% month-on-month (m-o-m) to 1.73 million tonnes as output improved 11.2% m-o-m.

"We expect a gradual improvement in palm oil stocks in the coming months as the peak output season continues – partially offset by restocking activities.

"We maintained the neutral sector call with a tactical positive trading strategy. We make no changes to our RM3,900 per tonne crude palm oil (CPO) price assumption for 2023 and 2024," it said. 

RHB said it still prefers Malaysian players compared to regional ones as Indonesia's tax structure and currency appreciation make earnings less competitive versus Malaysia. 

Its top picks include Kuala Lumpur Kepong (KLK), IOI Group, Sarawak Oil Palms (SOP) and Ta Ann (TAH). while for a regional flavour, it prefers integrated exporters like Wilmar International and Golden Agri. 

For Kenanga Research, it said the plantation sector offers deep value, from long-term exposure to robust palm oil demand underpinned by the food and biofuel sectors to increasingly valuable land holding as new regional oil palm development is becoming scarce due to limited land availability and regulations. 

It said while CPO selling prices could be volatile, well-managed plantations could offer good returns and cash flow. 

"We like KLK for its strong track record, regional upstream operations and growing downstream operations, PPB Group for Wilmar's exposure to China and India along with its own exposure to Southeast Asia's growing consumer essential segment and Hap Seng Plantations Holdings which offers upstream exposure with cash surplus to sustain a decent dividend yield," it said.

Kenanga Research also said while it expects CPO prices to be maintained at RM3,700 per tonne for 2023-2024, the ongoing supply risk premium commanded by CPO may require a slightly (3 to 5%) firmer price adjustment.

Another research firm, Public Investment Bank (PublicInvest Research) forecast a full-year CPO price at RM3,800 per tonne.

In view of the weak CPO price performance and lacklustre fresh fruit bunches production growth, it expects to see another set of poor plantation results for the second quarter. 

"Meanwhile, the oversupply of petrochemical caused by the influx of new chemical factories in the US and China is expected to negatively impact the oleochemical business," it added.