This article first appeared in The Edge Financial Daily on January 21, 2020

KUALA LUMPUR: Kuala Lumpur Kepong Bhd (KLK) and Genting Plantations Bhd are deemed major beneficiaries of crude palm oil’s (CPO) price rise, due to their substantial exposure to the oil palm plantation sector’s upstream segment, according to Kenanga Investment Bank Bhd and RHB Investment Bank Bhd.

Kenanga analyst Adrian Kok wrote in a note yesterday that among stocks covered by Kenanga, the research firm continues to favour Genting Plantations due to, among others, its upstream exposure of about 45%, which allows it to capitalise on the sharp CPO price rally.

“[We] reiterate ‘overweight’ on the plantation sector with an unchanged CY20 (calendar year 2020) CPO price forecast of RM2,700/tonne. While we concur with the general view that [the] CPO price is likely to correct slightly in the near term, we are unperturbed as it would restore CPO’s competitive edge over its rival oils. Thus far, the demand-supply dynamics remain favourable to CPO and we underscore that any weaknesses in planters’ share price could serve as a buying opportunity,” Kok said.

At Bursa Malaysia yesterday, the CPO price for March 2020 rose RM62 to RM2,940 a tonne at press time. Kenanga has a target price (TP) of RM12.10 for Genting Plantations shares, with an “outperform” call. Genting Plantations slipped four sen or 0.38% to RM10.56, with a market value of RM9.47 billion.

On KLK, RHB analyst Hoe Lee Leng wrote in a note KLK’s 60% to 65% exposure to upstream oil palm operations will be useful for the company in a CPO price upcycle. RHB is maintaining its “buy” call for KLK shares with a higher TP of RM30.10 from RM27.35 previously.

“After imputing our revised CPO price assumptions, we also raise FY20-21F (financial years 2020-2021 forecast) earnings for KLK by 11-13%. We believe the company will be able to post better earnings for its upstream segment in 1H20 (first half of 2020), as it should ride on the recent uptrend in CPO prices. Its latest share price implies a 2020 P/E (price-earnings) of 28x (times), which is at an attractive discount to its peers’ 30-35x,” Hoe said.