This article first appeared in The Edge Financial Daily on November 5, 2019
Plantation sector
Maintain neutral: The Malaysia Derivatives Exchange (MDEX) crude palm oil (CPO) price in November rose above RM2,400 per tonne last week and closed at RM2,422 per tonne last Friday.
We are unsure if the surge in CPO prices is sustainable due to the speed and magnitude of the increase. However, we are cognisant of the fact that CPO prices are usually higher in the fourth quarter (4Q) and 1Q of the calendar year as these are the low-production months.
The average Malaysian Palm Oil Board physical delivery price was RM2,012 per tonne in the first 10 months of 2019, while the average MDEX CPO price has been RM2,174 per tonne year to date. Usually, there is a difference of RM100 to RM150 per tonne between the physical delivery and MDEX prices due to transportation and logistic costs.
Our average CPO price assumptions are RM2,100 per tonne for 2019 and RM2,200 per tonne for 2020. We believe the consensus assumes average CPO prices of RM2,000 to RM2,200 per tonne for 2019 and RM2,200 to RM2,500 per tonne for 2020.
We are “neutral” on the plantation sector for now. However, for investors who would like exposure to it, we recommend Kuala Lumpur Kepong Bhd (KLK) as its price-earnings (PE) valuation has become palatable after a decline in its share price. We have a fair value of RM22.05 for KLK based on forecast financial year ending Sept 30, 2020 (FY20F) PE of 27 times. KLK is currently trading at FY20F PE of 26.5 times versus IOI Corp Bhd’s financial year ending June 30, 2020 PE of 28.2 times and Sime Darby Plantation Bhd’s financial year ending Dec 31, 2020 PE of 40.2 times.
In roughly two weeks, the MDEX spot CPO price surged by 15.3%, climbing to RM2,444 per tonne last Thursday from RM2,119 per tonne on Oct 14. The surge in CPO price came in spite of the news that India was mulling higher import taxes on refined palm oil and an advisory by the Solvent Extractors’ Association of India that its members shun imports of Malaysia’s palm products.
Recall that in the second half of 2018, CPO prices slumped as there was a glut in Indonesia, especially in Kalimantan. Industry palm production surged in Indonesia but at the same time there were not enough barges or vessels to ship CPO to refineries. The barges or vessels were used to transport biodiesel instead as Indonesia accelerated the implementation of the 20% biodiesel programme (B20).
Malaysia is expected to implement B20 at the end of next year under Budget 2020. Hence, the impact may only be felt from 2021. B20 is estimated to result in consumption of 1.3 million tonnes in total, about 6.5% of Malaysia’s CPO production of 20 million tonnes forecast for 2020.
In terms of discretionary demand for biodiesel, however, this may weaken as CPO is now more expensive than gas oil. Based on current prices, the CPO price is US$18 (RM74.70) per tonne higher than the gas oil price. — AmInvestment Bank, Nov 4