Although fundamentals still point to moderating prices in 2022, the risk of La Niña in 4Q21 and 1Q22 could keep prices higher for longer, says RHB Group Research analyst Hoe Lee Leng. 

She maintains “underweight” on the plantation sector, with a “neutral” recommendation on three out of four of the Singapore-listed stocks covered. 

In a Nov 5 note, Hoe says crude palm oil (CPO) prices remain buoyant at current levels, mainly due to the still-disappointing production numbers from Malaysia, which is down 9% y-o-y as at September. 

“We still maintain that prices are due for a correction, as supply and demand fundamentals are improving. We highlight that, assuming weather remains normal, the stock/usage ratios for the eight vegetable oil composite and 17 oils and fats composite is expected to rise above 30-year historical levels in 2022, on the back of improved supply from palm as well as oilseeds globally. This signifies that prices should moderate y-o-y in 2022,” Hoe explains. 

See: UOB maintains 'market weight' for plantation sector, First Resources among sector picks

RHB acknowledges that the largest risk to this assumption is the weather, as a La Niña alert has been triggered recently with an 81% probability of it occurring over Oct to Dec 2021. Hoe notes that historically, La Niña developed 70% of the time when the alert criteria have been met.

“Some of these models predict that a La Niña, if it emerges, could persist through January and March 2022. Should this occur, it could have a damaging effect on crops in the Northern Hemisphere – particularly on the soybean planting season in South America, which starts in November. This could also have a positive impact on soybean prices, which could in turn influence other vegetable oils,” says Hoe. 

Given the still-elevated CPO prices, RHB is in the midst of reviewing its CPO price assumptions of RM3,000 per tonne for 2022 and RM2,900 per tonne for 2023. 

Hoe says the team has done a sensitivity analysis to estimate the target prices of the stocks it covers at different price points, assuming the target P/Es used are unchanged. 

“Based on this analysis, it would seem most companies are reflecting CPO prices of around RM3,100 to RM3,300 per tonne for 2022, although some are already reflecting higher prices of RM3,400 to RM3,500 per tonne,” she adds. 

Although plantation companies’ share prices are finally moving along with the CPO prices for the first time in the year, the movement continues to lag that of CPO prices in terms of quantum, Hoe highlights. 

CPO prices jumped up 18% in the space of six weeks. Only a few exceptions have seen price movements above 10% during the same period, which includes First Resources, Bumitama Agri and Golden Agri. 

That said, there could be trading opportunities for stocks that are still reflecting relatively low CPO prices such as First Resources, says Hoe. Meanwhile, other stocks such as Wilmar continue to remain undervalued.

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Hoe’s target price for Wilmar, First Resources, Bumitama Agri and Golden Agri are $5.60, $1.70, 47 cents and 24 cents respectively. 

As at 2.44pm, shares in Wilmar, First Resources, Bumitama Agri and Golden Agri are trading at $4.35, $1.61, 55 cents and 26.5 cents respectively. 

Photo: Bloomberg