UOB Kay Hian is keeping its “market weight” rating for the regional plantation sector as crude palm oil (CPO) prices are expected to remain weak, amidst the backdrop of a growing shift towards renewable diesel.
Analysts Leow Huey Chuen and Jacquelyn Yow highlight that the global trade for conventional palm-oil-based biodiesel is expected to decline, while a huge growth in the global trade for renewable diesel, which uses vegoil, is expected to jump.
“This is mainly coming from the conversion of new refinery capacity (especially in the US) as well as the expansion of existing capacity (Neste). The growth of renewable diesel production is also pushed by the growing demand in the US market and a potential new demand from other countries such as Canada,” the analysts write in a July 16 research note.
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The way Leow and Yow see it, palm oil may not directly benefit from this trend towards renewable diesel, as production in the US and Europe, the largest market producer and consumer of biodiesel, will primarily rely on soybean oil (SBO) and rapeseed oil (RPO).
However, they note that palm oil may be an indirect beneficiary by replacing SBO and RPO in the food and industrial chemical markets as well as animal feed.
Leow and Yow have maintained their CPO price assumptions of RM3,000 ($966) per tonne and RM2,600 per tonne for 2021 and 2022 respectively for now, though they are looking to revise the assumptions after the 2Q2021 results announcement in August.
“We expect CPO ASP for 2021 to beat our assumption of RM3,000/tonne and come in at RM3,300-3,500/tonne,” they remark.
Nonetheless, the analysts highlight the overall downward trend in CPO prices, pointing out that in the first five months of 2021, CPO average spot price was at RM4,119.50 but has since weakened to RM3,592 on Jun 22. CPO futures for July and September are trading at RM3,631/tonne and RM3,465/tonnes respectively.
To that end, they remain bearish on the sector given the weak outlook. “The sector is likely to continue underperforming the market because of lower earnings leverage to rising CPO prices, production uncertainties and investors’ constraints on concerns over environmental, social and governance (ESG) compliance,” they explain.
First Resources remains the sole Singapore counter among their list of stock picks for the sector, chosen by virtue of “decent” dividend yield and “undemanding” valuation. “Our picks are Hap Seng Plantations, Sarawak Oil Palms, First Resources, Astra Agro Lestari and Tunas Baru Lampung,” the analysts say.
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The analysts have a “buy” rating on First Resources with a target price of $1.65.
As at 9.10am, shares in First Resources are trading up 2 cents or 1.53% higher at $1.33.