KUALA LUMPUR: Crude palm oil (CPO) prices could remain elevated until the first half (1H) of 2022 but may soften as production of global vegetable oils picks up, said Affin Hwang Capital.
Affin Hwang analyst Nadia Aquidah said CPO prices had risen to a new high of between RM5,900 and RM6,000 per tonne last week due to the lingering sentiments of tight supply, as well as an increase in related edible oils and crude oil prices.
She added that India's tax cut on CPO imports coupled with the Indonesian government's recent announcement to regulate palm-oil exports had also kept CPO prices high.
"Nonetheless, we believe global production of vegetable oils will increase in 2022 on the back of relatively better weather conditions at most producing countries and higher crushing activities," she said in a research note today.
Nadia said there were still many uncertainties on both the global supply and demand side, which could determine the timing and magnitude of price changes in the coming months.
"We expect all the plantation companies to benefit, especially those with the higher earnings prospects."
She said upstream plantation companies would likely be more sensitive to any changes in CPO prices, and those that operate in Malaysia could benefit more compared with Indonesian operations which would need to temporarily sell a portion of their palm-oil products at a lower price.
Affin Hwang raised its average CPO price forecast to RM4,400 per tonne from RM3,300 per tonne previously.
"This is to reflect the recent developments in the edible oils market. We will revise the plantation companies' earnings to reflect the new CPO average selling price assumptions in the upcoming results season."
It added that key risks to its neutral call for the plantation sector included stronger/weaker-than-expected demand and lower/higher-than-expected production affecting the prices of vegetable oils; stronger/weaker-than-expected exports of palm-oil products; stronger/weaker-than-expected biodiesel production especially in Indonesia and Malaysia; and changes in policies and taxes.
Meanwhile, Nadia said foreign funds could possibly return to Malaysia's plantation stocks, partly due to foreign as well as local funds' interest.
"This would be good for the industry as it can provide some liquidity. But we think there could potentially be pockets of opportunities in the short term during this high CPO price environment."
She said most of the plantation stocks' share prices had moved higher year-to-date and there could still be some opportunities as companies release their financial results this month, showing strong year-on-year (YoY) earnings growth given the high CPO selling prices achieved.
For the large-cap stocks, Affin Hwang expects strong beneficiaries from this near-term uptrend to include United Plantations Bhd.
For the small-mid cap stocks, they include Hap Seng Plantations Holdings Bhd, Sarawak Plantations Bhd, United Malacca Bhd, Far East Holdings Bhd and Kim Loong Resources Bhd, Kretam Holdings Bhd, Harn Len Corp Bhd and BLD Plantation Bhd.
"These are companies for which we think valuation may still be attractive and that share prices have not risen substantially," she said.