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RHB remains cautious of the plantation sector but names Wilmar a counter to look out for

Amala Balakrishner
Amala Balakrishner • 3 min read
RHB remains cautious of the plantation sector but names Wilmar a counter to look out for
The locust attacks could possibly decimate crops and livelihoods there, observe RHB analysts Hoe Lee Leng, Christopher Benas and Juliana Cai.
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SINGAPORE (July 22): Africa, India and Pakistan – key crop producing nations – have been facing their worst locust attacks following the heavy rains there since Cyclones Mekunu and Luban hit in 2018.

Specifically, this is Kenya’s worst locust attack in 70 years, while it is the worst for Pakistan and India in three decades. India and Pakistan’s biggest ever locust attack occurred in 1993 when 172 locust swarms damaged some 310,500 hectares of crops and vegetation.

The current upsurge is “more serious”, with preliminary estimates showing over 2,000 locust swarms entering India between May 2019 and February 2020. These swarms have been spreading rapidly to at least nine states.

This could possibly decimate crops and livelihoods there, observe RHB analysts Hoe Lee Leng, Christopher Benas and Juliana Cai.

“While efforts are being made to contain the spread, there are expectations that it will worsen during the July-October monsoon period, as locusts prosper in wet conditions,” they point out in a July 21 note.

Such a situation puts some 40 million tonnes of India’s oilseed crop at risk. With the country being the world’s fifth largest producer with a 6% market share, the RHB trio caution that the October 2020 – September 2021 crop year may well take a hit. “This could mean edible oil imports in 2021 should be boosted by the weakened local oilseed output,” they note.

Across the border in Pakistan, output stands at only 3.2 million tonnes. With rising imports there, the RHB team says that any impact to its domestic ouput should result in higher edible oil imports.

On the whole, they are looking at a 16% year-on-year increase in edible oil imports in both India and Pakistan. This is higher than the 13.5% increase forecast for India by Globoil, and the 5% for Pakistan indicated by the US Department of Agriculture.

“Based on our scenario analysis for palm oil demand, this could potentially result in lower stock/usage ratio in 2021 of 18.9% (from our original estimate of 19.7% and vs our projection of 20.4% for 2020). CPO prices could rerate higher as a result,” stress Hoe, Benas and Cai.

To this end, the trio are remaining neutral on the sector and say they will be monitoring the progress of the locust invasions. “Our 2020F-2021F CPO price assumption remains unchanged at MYR2,400 and MYR2,500/tonne ($780.15 - $812.65),” they add.

Within the sector, the trio have found gems in Malaysia-listed IJM Plantations and Indonesia-listed Astra Agro Lestari and have posted “buy” calls for both at RM2.05 and IDR9,100 (86 cents) respectively.

Back home, Wilmar International is a top pick with the analysts reiterating their “buy” call at $4.83.

As at 11.29am, the counter was up a cent or 0.231% to $4.34.

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