KUALA LUMPUR (Aug 12): CGS-CIMB Research has maintained its “neutral” rating on the Malaysian agribusiness sector and raised its average crude palm oil (CPO) price forecasts to RM3,700 for 2021, RM2,900 for 2022 and RM2,800 for 2023.

In a sector update today, the research house said Malaysian palm oil stocks unexpectedly fell 7% month-on-month (m-o-m) to 1.5 million tonnes as at end-July 2021.

“This is below expectations and positive for CPO price.

“We cut our 2021F (forecasted) CPO production to 18.6 million tonnes from 19.4 million tonnes, as our view for the ban on foreign workers to be lifted looks unlikely in 2H21,” it said.

CGS-CIMB projected palm oil stocks to rise 4.5% m-o-m to 1.56 million tonnes by end-Aug 2021F, with output/exports projected to rise by 10%/0% m-o-m respectively.

“We project CPO prices to remain firm at RM3,500-4,500/tonne in August 2021F, amid low global edible oil inventories, tight palm oil stocks and our expectation that palm oil supply in Malaysia will remain below potential for the remainder of the year due to the ongoing ban on foreign workers.

“In line with this, we have revised up our average CPO price assumptions for 2021F/2022F/2023F to RM3,700/2,900/2,800 per tonne (versus RM2,900/RM2,700/RM2,700 per tonne previously),” it said.

On its stock picks, the research house said it likes Genting Plantations Bhd for its the group’s land bank and young estates.

“The group has one of the youngest estate age profiles among its big-cap peers in Malaysia,” it said.

CGS-CIMB’s other picks are Kuala Lumpur Kepong Bhd (KLK) and Ta Ann Holdings Bhd.

“We favour KLK as its current FY22F P/E of 21 times is trading below its historical average mean P/E of 26 times. The other attraction is KLK’s relatively defensive earnings against current concerns over rising Covid-19 cases in Malaysia.

“We like Ta Ann for the improving earnings prospects of its plantation division from higher CPO prices and FFB production in 2021F, coupled with decent dividend yields of 5.8% for FY21-23F,” it said.

Meanwhile, commenting on the Asia palm oil sector, Credit Suisse in a note Aug 10 said that widely recognised as one of the most controversial crops, it is unsurprising that the palm oil sector has de-rated significantly over the years, particularly as sustainable investing has gained momentum globally.

The research house said ongoing environmental and social concerns have caused the sector to trade at record-low P/E valuations today.

Credit Suisse said planters currently trade at 24% below replacement cost, with significant discounts seen in upstream planters.

“We note landbank appreciation prospects in stringent new planting certification standards and reforestation potential. Separately, palm oil price is rebounding to multi-year highs on the possible re-emergence of La Niña.

“We upgrade Sime Darby Plantation Bhd to 'outperform'. Sime Plantation is now trading at an undemanding FY21E P/E of 12 times (13% below regional average) and is the most leveraged to upside surprise in CPO price.

“Its 100% RSPO-certified landbank and good governance make it a potential beneficiary of future environmental, social and governance inclusion,” it said.