TA Securities maintains 'Neutral' on plantation sector

TA Securities maintains 'Neutral' on plantation sector

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KUALA LUMPUR (Dec 6): TA Securities Holdings Bhd has maintained its “Neutral” call on the plantation sector on recovering crude oil prices prompted by Indonesia’s aggresive biodiesel push and favours Sime Darby Plantation Bhd (target price: RM5.72 per share) as its stock pick.

It said in a note today, “We like Sime Darby Plantation for its attractive growth profile, sustainable dividend policy of 50% payout ratio, strong earnings growth prospect and attractive valuations.

“Meanwhile, we downgraded Wilmar to Sell from Hold due to pricey valuation,” it added. 

Risks to the sector include upgrade revisions to soybean production estimates, weaker-than-expected demand in China and India, unfavourable government policies affecting demand, and any escalation of the Sino-US trade wars.

According to the research house, crude palm oil (CPO) prices have been recovering since August after Indonesia announced its aggressive plans to increase its biodiesel mandate from B20 (a blend of 20% palm oil and 80% fossil fuel) to B30 (a blend of 30% palm oil and 70% fossil fuel) by January 2020 and B50 by 2021.

The move is expected to absorb more palm oil from the market.

“Besides, we believe the rally was also driven by bullish sentiment driven by anticipation of lower palm oil production in the coming months,” TA Securities said.

The research house noted that the Indonesia’s B30 mandate would have a bigger impact on the total use of palm oil to reduce inventory compared with Malaysia, which will implement the B20 at the end of 2020.

The commodity’s premium to gasoil has grown to US$78 per tonne now from a discount of US$61 in the past year.

“As such, we believe that Malaysia’s government may also need to replicate a fuel stabilisation programme similar to Indonesia by setting up a biodiesel stabilisation fund (BSF) to subsidise biodiesel blending,” it added.

As at 10.05am, Sime Darby Plantation went up 11 sen or 2.14% to RM5.26 and saw some 783,400 shares traded, valuing it at RM36.21 billion.