KUALA LUMPUR (March 24): MIDF Research has upgraded the plantation sector to "positive" from "neutral" after revising up its crude palm oil (CPO) price target to RM3,000 per ton from RM2,700 per ton.

Malaysian Palm Oil Board (MPOB) board data showed palm oil prices staying at RM4,240.50 as of yesterday (March 23).

In a thematic note today, MIDF said it revised up its palm oil price forecast due to the sanguine CPO price environment propelled by a few positive catalysts, namely: stronger prices of soybean oil, possible supply tightness on a low inventory level; anticipation of lower production due to labour shortage issues; and expectations of better export demand.

The research house said it is anticipating tight soybean supply, especially from Argentina, to lead to stronger soybean prices which, in turn, will drive CPO selling prices.

“On top of that, the subdued inventory level of palm oil in Malaysia would also act as a catalyst for CPO prices,” it said.

It also expects the inventory level to stay below the two million level in view of the slower production period.

“We also believe the palm oil supply tightness situation will likely remain until 2Q21 (the second quarter of 2021), given the weaker output during post-peak production,” it said.

Nonetheless, it expects production to recover in the second half of 2021 (2H21) but below potential given that Malaysia has strong reliance on foreign workers.

Meanwhile, on the export demand front, it posits that export demand will recover on the back of a gradual recovery in economic activities in India and China, and restocking activities ahead of the month of Ramadan.

“As for the CPO futures contract on Bursa Malaysia Derivatives, it is notable that the price has rallied to above RM4,000 level per tonne amid strong market sentiment and a rally in the soybean oil market. This represents the highest CPO futures in more than 10 years,” it said.

Going forward, the research house opined that CPO futures trading will be dominated by low production and inventories in the local plantation sector.

It anticipates the effects of the pandemic to subside in 2H21 given that Malaysia already rolled out its first batch of Covid-19 vaccines in February, in addition to further relaxation of movement control order (MCO) rules.

Following the revision of its 2021 CPO price forecast to RM3,000 per tonne, MIDF revised up its financial year 2021 (FY21) earnings forecasts for stocks under its coverage by 5.4% to 25.8%.

Two stocks were upgraded to "buy", namely IOI Corp Bhd and PPB Group Bhd.

For IOI Corp, MIDF upgraded the stock to "buy" from "neutral", with a revised target price (TP) of RM4.93 (previously RM4.52).

“We anticipate its upstream segment to continue to shine as CPO prices are expected to be sustained above the RM3,000 per ton level at least until 1H21,” it said.

MIDF also upgraded PPB to "buy" from "neutral", with a revised TP of RM21 (previously RM18.64).

It said the group’s film exhibition and distribution is expected to recover in 2HFY21 and achieve further meaningful recovery in FY22.

“On a side note, we also expect the contribution from its Singapore-listed associate company, Wilmar, to continue to provide support to the group’s earnings,” it said.

MIDF’s top pick in the plantation sector is Kuala Lumpur Kepong Bhd (KLK) ("buy"; TP: RM27.01).

"Post revision, we forecast KLK’s FY21 earnings to grow by 12.3%, driven by earnings from its associate Synthomer," it said.

The research house said it also favours TSH Resources Bhd ("buy"; TP: RM1.44) given a young tree age profile of its Indonesian operations and its high earnings sensitivity to current elevated CPO prices.

“As a result of the revision of our 2021 CPO price forecast, we are anticipating an increase in TSH’s earnings by +13.2% for FY21,” it said.

MIDF also likes IJM Plantations Bhd ("buy"; TP: RM3.64) given its upstream division, which continues to perform well, mainly contributed by its Malaysian and Indonesian operations.

Aside from that, post 2021 CPO price revision, it is forecasting IJM’s earnings to grow by 8.7%, fuelled by higher CPO prices and improved sales for its property development segment.