The ESG disconnect – The Star Online

The ESG disconnect The Star Online

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KUALA LUMPUR: Despite the bullish crude palm oil (CPO) prices, the valuations of plantation stocks on Bursa Malaysia will likely remain held back by the environmental, social and governance (ESG) concerns moving forward.

This will also result in most plantation stocks trading at significantly below historical valuations, said analysts.

According to RHB Research, the ESG discounts have resulted in a major disconnect between CPO prices and planters’ share price performance, which should remain in the medium term.

While there was a small jump in planters’ share prices in October and November, the research house, in its latest report, noted: “This phenomenon did not last long as share prices have since fallen back.

“We believe that the ESG concerns will continue to linger, especially in recent times when more local Malaysian companies have been called out for labour-related ESG issues.”RHB Research pointed out that CPO is currently trading at a premium to soybean oil of US$13 (RM54.78) per tonne from US$25 (RM105.34) per tonne discount last month.

The historical CPO price discounts to soybean was US$100 (RM421.35) to US$150 (RM632) per tonne previously.

“The CPO prices remain high, due to weather, weak production in Malaysia and high energy prices. While we expect these conditions to remain – keeping prices elevated possibly until first quarter of 2022 (Q1’22) – we expect a more significant moderation of prices to come by mid-2022,” explained RHB Research.

“This means CPO’s competitiveness is reduced and we should see some switching activities occurring soon,” it said.

Despite the risk of La Nina, the soybean prices have remained relatively sombre especially when compared to CPO prices.

The research house has also raised its CPO price assumptions for 2021 to 2023 to RM4,000, RM3,700 and RM3,000 per tonne respectively.

“The CPO prices remain high, due to weather, weak production in Malaysia and high energy prices. While we expect these conditions to remain – keeping prices elevated possibly until first quarter of 2022 (Q1’22) – we expect a more significant moderation of prices to come by mid-2022,” explained RHB Research.

On the stock to usage ratios for the composites of 17 oils and fats, the research house said that eight vegetable oils and 10 oilseeds are expected to rise to above historical averages in 2022.

“This means that stock levels are no longer expected to be as tight as they were in 2019 and 2020, paving the way for a moderation in prices,” it added.

The climate conditions will also remain as a risk to CPO prices, with the La Nina now declared as confirmed by the Australian Bureau of Meteorology, while the United States National Oceanic and Atmospheric Administration has it at a 92% probability.

Climate models suggest this La Nina will be short-lived and moderate in strength, however, persisting until February or March 2022.

Also, most climate models expect this to be of moderate strength.

“As it is just the beginning, things are still fluid and we would need to monitor crop conditions in South America closely, especially since planting season has started,” RHB Research noted.

Meanwhile, CGS-CIMB Research opined that strong CPO prices and expectations of a recovery in production in 2022 will be partially offset by higher fertiliser costs, and reiterated its “neutral” view on the plantation sector.

“We are of the view that CPO price could remain high till Q1’22 before trending lower when palm oil supply recovers and crushing activities of oilseeds improve,” the research firm said in its report.

The research unit projected palm oil stocks to decline by 7.1% month-on-month (m-o-m) to 1.69 million tonnes by end-December 2021, with output falling 5% m-o-m and exports rising 2% m-o-m.

“We project CPO prices to remain firm at RM4,000 to RM5,000 per tonne in December 2021, amid tight near-term global edible oil and palm oil inventories.

“We also maintain our CPO price forecasts of RM4,270 for 2021, RM3,600 for 2022 and RM3,240 per tonne for 2023 respectively,” added the research house.

Its key plantation picks are Kuala Lumpur Kepong Bhd (KLK) with a target price (TP) of RM22.22, Genting Plantations Bhd with TP of RM8.28 and Hap Seng Plantations Bhd with a TP of RM2.35.

Moving into December 2021, Hong Leong Investment Bank (HLIB) Research opined that that slower exports to China arising from seasonal factors and India on the back of higher vegetable oil stockpile will be mitigated by seasonally lower palm production cycle.

HLIB Research maintained its CPO price assumptions for 2021 to 2023 at RM4,250, RM3,500 and RM2,900 per tonne respectively.

“We believe CPO price will stay lofty in the near term, on the back of near term supply constraints, and the onset of La Nina episode, which has a 95% chance lasting through February 2022, according to United States Climate Prediction Center,” said HLIB Research.

The research unit said a more noticeably decline in CPO price will only happen when supplies of vegetable oil particularly palm oil and soybean start showing signs of recovery possibly by Q2’22.

HLIB Research maintained its “overweight” rating on the plantation sector, underpinned by good near term earnings prospects arising from high CPO prices) and commendable valuations.

Its top picks are IOI Corp Bhd with a TP of RM4.35, KLK with a TP of RM25.62), Sime Darby Plantation Bhd with a TP of RM5.03 and TSH Resources Bhd with a TP of RM1.35.

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