Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on October 1, 2019

Genting Plantations Bhd
(Sept 30, RM9.91)
Upgrade to buy with a higher target price (TP) of RM11.35:
This is on our “overweight” sector upgrade, as we expect crude palm oil (CPO) prices to rerate upwards in the fourth quarter of 2019 (4Q19) and continue the upward trend in the first half of 2020 (1H20). We believe plantation stocks would also likely rerate on this price movement, as CPO prices are the leading indicator for plantation companies’ price-earnings (PE) ratios.

When CPO prices start moving, plantation companies’ PEs will expand first, before earnings catch up and valuations return to normal. As such, we lift our target PEs for the plantation stocks under our coverage by three to five times to trade at one-standard deviation above their historical averages. This is because we expect plantation stocks to trade at more inflated valuations in the short term, before earnings improve.

We leave our CPO price assumptions unchanged at RM2,200 per tonne for 2019 and RM2,400 per tonne for 2020. The main premises for our upgrade are the ongoing trade war, with import duties being levied on US soybeans; a CPO production slowdown imminent in 2020, while inventories should normalise by 1Q20; that demand should remain strong from China, due to the continuing African swine flu epidemic in the country; the B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020; crude oil prices will remain relatively high, resulting in a positive CPO-gasoil price gap; and weather conditions remain normal.

The trade war still has far-reaching effects on the sector, not only on soybean demand and supply dynamics, but also on crude oil prices and foreign exchange volatilities. This is combined with improving supply-demand dynamics of the CPO and eight vegetable oil complex, which should lead to improved CPO prices in 2020.

We opined that investors should position for the run-up in CPO prices that we expect to see within the next few months, as share prices should react positively in tandem as well. In addition, we believe the market would need to look for stock ideas with a positive earnings growth momentum during the current uncertain global economic conditions.

We upgraded our recommendation for Genting Plantations Bhd to “buy” with a higher sum-of-parts-based TP, after raising our target PE for the plantations wing to 30 times 2020 forecasts from 25 times, and maintaining our 40% discount to the revalued net asset value for the property division. The TP implies an enterprise value per hectare of US$18,000, in line with peers’ US$15,000 to US$20,000. Genting Plantations’ mostly upstream earnings will bode well in a CPO price upcycle, while its decent double-digit fresh fruit bunch (FFB) growth should provide a stable earnings base. — RHB Research Institute, Sept 30

      Print
      Text Size
      Share