MALAYSIAN plantation companies will continue to benefit from the bullish commodities supercycle for another two quarters at least which should help sustain investors’ interest in the sector counters in the short term despite yesterday’s selling. 

The benchmark FTSE Bursa Malaysia KLCI fell 20 points or 1.27% yesterday to 1,582 points while the Plantation Index fell 4.12% or 334.4 points while the Technology Index fell 3.7% on profit-taking by investors. 

Despite the fall yesterday, analysts, on the whole, believe plantation sector counters could see an extended price rally supported by strong quarterly earnings as the sector benefits from bullish edible oil market fundamentals. 

Malacca Securities Sdn Bhd head of research Loui Low said the strong crude palm oil (CPO) prices have boosted the earnings of plantation counters and attracted investor interest. 

“We believe the plantation sector is set to continue its recent rally for at least up to one or two quarters going forward,” he told The Malaysian Reserve. 

While the environmental, social and governance (ESG) concerns persist among investors, Low said the strong earnings performances right now outweigh other concerns in the minds of most investors. 

He expects 2022 will be a bumper earnings year for plantation companies and the relatively low valuation of the sector makes it attractive enough to narrow the discount ESG concerns had put on share prices earlier. 

“For funds that are not carrying the ESG kind of mandate, they will be able to invest in plantation counters as CPO price is set to trade around the RM5,500 per tonne level for now,” he added. 

For the past one month alone, Sime Darby Plantation Bhd’s share price rose 14.50%, while Kuala Lumpur Kepong Bhd (KLK) climbed 17.21%. 

Sime Darby Plantation’s net profit more than tripled to RM468 million in the fourth quarter ended Dec 31, 2021 (4Q21), underpinned by both its upstream and downstream segments. 

Quarterly revenue jumped 52.51% to RM5.55 billion from RM3.64 billion previously. 

This resulted in higher earnings per share of 6.8 sen for Sime Darby Plantation in 4Q21 from 2.2 sen in 4Q20, the group’s Bursa Malaysia filing showed. 

KLK’s net profit surged 67.69% to RM599.32 million in its recent quarter (1Q22), from RM357.41 million a year earlier, driven by sharply higher palm oil prices. 

KLK’s quarterly revenue surged 58.82% to RM6.83 billion from RM4.3 billion in 1Q21 and earnings per share expanded to 55.6 sen from 33.1 sen, according to its Bursa Malaysia filing. 

FGV Holdings Bhd share price has jumped 22.37% and IOI Corp Bhd gained 12.47% in a month. 

Affin Hwang Investment Bank Bhd analyst Nadia Aquidah noted local institutional investors and foreign funds could have returned to Malaysia’s plantation stocks which would be good for the industry as it can provide some liquidity. 

“We think there could potentially be pockets of opportunities in the short term during this high CPO price environment,” she noted in a report yesterday. 

She added that most plantation stocks share prices had moved higher year-to-date and there could still be opportunities as more companies release their financial results this month. 

Nadia expects CPO prices could remain elevated until the first half of 2022 and then soften as production of global vegetable oils picks up. 

She stated CPO price had risen to a new high of between RM5,900 and RM6,000 per tonne last week due to the lingering tight supply, as well as an increase in related edible oils and crude oil prices. 

“India’s move to cut tax on CPO imports coupled with the Indonesian government’s recent announcement to regulate palm oil exports had also kept CPO prices high. 

“Nonetheless, we believe global production of vegetable oils will increase in 2022 on the back of relatively better weather conditions at most producing countries and higher crushing activities,” she said. 

Nadia expects all the plantation companies to benefit, especially upstream plantation companies which are more sensitive to any changes in CPO prices and those that operate in Malaysia could benefit more compared with Indonesian operations which would need to temporarily sell a portion of their palm oil products at a lower price. 

Affin Hwang has raised its average 2022 CPO price forecast to RM4,400 per tonne from RM3,300 per tonne previously. 

“We will revise the plantation companies’ earnings to reflect the new CPO average selling price assumptions in the upcoming results season,” she noted. 

Source : The Malaysian Reserve