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Tuesday, March 24, 2020

Plantation stocks now ‘absurdly cheap’

Tuesday, 24 Mar 2020

TA Securities rated most stocks in the sector as “buy”. These included Sime Darby Plantation Bhd, Kuala Lumpur Kepong Bhd, FGV Holdings Bhd, IJM Plantations Bhd, TSH Resources Bhd, and United Malacca Bhd as well as Singapore-listed Wilmar International Ltd.

PETALING JAYA: Heavily battered along with the broader market, plantation stocks on Bursa Malaysia now appear attractive in terms of valuation.

In its report yesterday, TA Securities Research termed the sector “absurdly cheap, ” with stocks under its coverage trading at 9.3 to 22.2 times estimated earnings for 2021.

“The fear of Covid-19 pandemic and global recession have caused significant sell-off in the market, including plantation stocks. Most of the plantation stocks are now at attractive valuations after the recent massive plunge, ” the brokerage wrote.

Overall, Bursa Malaysia’s palm oil plantation index has been trending down since the start of 2020, and after a relatively strong rally in the second half of 2019.

Year-to-date, the benchmark index for plantation stocks has fallen by about 26%.

Reiterating its “overweight” recommendation on the plantation sector, TA Securities rated most stocks in the sector as “buy”.

These included Sime Darby Plantation Bhd, Kuala Lumpur Kepong Bhd, FGV Holdings Bhd, IJM PLANTATIONS BHD, TSH RESOURCES BHD, and UNITED MALACCA BHD as well as Singapore-listed Wilmar International Ltd.

The only counter still under its “sell” call was IOI Corp Bhd.

Despite the ongoing headwinds, TA Securities maintained its average crude palm oil (CPO) price forecast at RM2,400 per tonne for 2020.

“We believe when the Covid-19 epidemic wears off, the consumption of edible oil will resume and this would boost palm oil demand and support CPO prices, ” it reasoned.

It noted the twin impact of the collapse in crude oil price and the spread of the Covid-19 has dragged CPO April-June futures contract down 10.8%-11.1% month-on-month to RM2,288 to RM2,338 per tonne.

Meanwhile, with Ramadan starting on April 24, TA Securities said it would expect Malaysia to see increased in export demand for palm oil.

“The effect of Ramadan restocking is expected to increase Malaysia’s palm oil exports in March and April to some extent.

“Note that India relies on imports to meet about 70% of its total vegetable oil consumption and palm oil is the largest consumed edible oil in India, ” it explained.

India has been the biggest palm oil buyer for Malaysia since 2014, accounting for nearly a quarter of Malaysia’s total palm oil exports in 2019.

TA Securities noted India’s total stock of edible oils had decreased to a five-year low of 1.53 million tonnes as at March 1, citing data from the Solvent Extractors’ Association of India.

Based on India’s monthly consumption of 1.9 million tonnes, the current stock level would suggest India would be running out of palm oil by end-March if there were no significant imports of the commodity by this month.

“This uncomfortable stock level makes us believe that Malaysia’s palm oil exports to India will grow significantly, despite the negative impact of Covid-19 on palm oil consumption in India, ” TA Securities said.

“However, we may only see the significant increase in April as Malaysia went into lockdown for 14 days from March 18-31 due to the spreading of Covid-19.

“This is expected to disrupt the total palm oil supply chain and affect the export performance, ” it added.

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