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Plantation stocks good value amid crude palm oil rally, says RHB Research

Ng Qi Siang
Ng Qi Siang • 3 min read
Plantation stocks good value amid crude palm oil rally, says RHB Research
Earnings are likely to be stronger y-o-y in 2020 and 2021 assuming a higher CPO price of MYR2500/tonne.
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Following months of weak oil prices, crude palm oil prices have rallied to present levels of MYR 2379/tonne ($772.11), with RHB Research recommending plantation stocks as value buys for the coming year. “With the markets in a liquidity-driven rally, we believe cyclical sectors like plantations could be the next play, providing investors with a relatively safe haven, in terms of earnings,” says the research house in a pair of broker’s reports issued yesterday.

So far, RHB has not noticed any significant catalyst that could have caused this re-rating aside from a surprisingly positive showing in Malaysian plantation statistics released recently. They suspect that the rally could have been largely caused by the increased liquidity in the market following the introduction of unprecedented liquidity into global markets across all asset classes.

RHB sees CPO prices holding steady in 3Q2020 given that CPO production only started to increase in June. Pent-up demand is likely to continue until at least August or September in light of Deepavali celebrations in November when demand for oil increases.

“Post-3Q20, we continue to hold our view that 4Q20F should see a pullback of prices on the back of the impact of the seasonal peak production which will end in 4Q20 and lower post-festive demand,” continue the reports. The research house sees CPO prices in 2020 to be 13% higher than in 2019 while production volume -- particularly in Indonesia -- will be higher.

Earnings are therefore likely to be stronger y-o-y in 2020 and 2021 assuming a higher CPO price of MYR2500/tonne. RHB thus sees this security of earnings proving a draw for investors should they spot good value in plantation stocks. With a new investment horizon of December 2021, it has kept its valuation targets intact going forward.

RHB has maintained its “neutral call” on First Resources as it believes that it is currently trading close to its historical mean. It has however raised its target price for the counter from $1.35 to $1.45 with a 4% upside. Dividend yield is expected to be 2.6% in 2021 and 2.7% in 2022.

Yet RHB has upgraded Bumitama Agri to “buy” with a new target price of $0.60 from an initial $0.48 with a 20% upside following an extension of its valuation period. Its price-to-earnings (P/E) ratio of 13 (up from 12) is at a slight discount relative to peers of 14-16 due to Bumitama’s weaker liquidity. Still, the counter’s valuation is attractive given that it is now trading below its historical mean while its pure planter model will allow it to benefit more from a rise in CPO price.

As of lunchtime close of trading, First Resources is trading 0.03 points up at $1.42 with a P/E ratio of 18.21 and a dividend yield stands at 1.65%. Meanwhile Bumitama Agri is up 0.025 points at $0.53 with a P/E ratio of 14.05 and a dividend yield of 1.68%.

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