CPO price to trade range-bound in near term
KUALA LUMPUR: The price of crude palm oil (CPO) could trade in a range-bound level after a steep correction from a peak in June, research house UOB Kay Hian Research’s (UOBKH) says.
The plantation sector, it addes. also lacks catalysts, with the CPO price anticipated to remain soft in the near-term, following the resumption of exports by Indonesia.
These are its forecasts as it notes, Indonesia appears to curb its current high inventory.
“We think CPO prices would still remain supported until year-end on the back of demand, recovery and potentially weaker-than-expected production, due to current high crops losses in Indonesia and Malaysia,” the research house said.
A pick up in demand from India is expected in the coming months, driven by the current CPO price and festive season.
India’s vegetable oil demand is back to pre-covid-19 levels with the hotel, restaurant and cafe segments’ operations back to normal levels, according to the Malaysia Palm Oil Council.
Further, longer term catalysts for the plantation sector could come from India’s decision to revisit imports duty if CPO prices continue to weaken, UOBKH Research said.
On the forward outlook for companies, UOBKH Research said there could be some earnings disappointment as companies with operations in Indonesia could be dragged by the impact of policies in that country.
“We will not be surprised if there is negative operating profit for some companies in the second or third quarters,” the research house said.
“Despite the expectations of stronger sales volume quarter-on-quarter in the third quarter, we reckon Indonesian plantation companies’ margins would remain weak as Indonesian domestic CPO prices are very close to the companies’ cost of production,” UOBKH Research added.
It preferred Malaysian plantation players which would still continue to benefit from high commodity prices.
UOBKH Research’s top pick is IOI Corp Bhd for which it has a ‘buy’ call with a target price of RM5.15 due to its high exposure to Malaysia as well as stable high refining margins compared to its peers.
“We also recommend Hap Seng Plantations Bhd with a “buy” call and a target price of RM2.80 on the back of its high dividend yield of 7.9% supported by its stronger-than-peers earnings,” it said.