This article first appeared in Capital, The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

NEUTRAL

CGS-CIMB RESEARCH (FEB 13): Malaysia’s palm oil stocks rose 3% month on month (m-o-m) to 2.27 million tonnes at end-January due to higher imports and declining exports. This is the first m-o-m rise in inventories since October 2022. Palm oil output fell 15% m-o-m to 1.38 million tonnes last month, mainly due to fewer working days and less flooding in some key palm oil areas.

However, palm oil output grew 10% year on year (y-o-y) due to higher fresh fruit bunch (FFB) yields and the worker shortage issue easing.

This is broadly in line with our expectation of Malaysia’s palm oil output to rise by 3.3% to 19.1 million tonnes in 2023. Palm oil exports fell 23% m-o-m and 2% y-o-y to 1.14 million tonnes last month, likely due to weaker demand from key consumers like India and China, which in turn was due to high palm oil stocks in their respective countries.

The inventory level in Malaysia at end-January was 2.27 million tonnes, which was in line with our estimate of 2.26 million tonnes per our stock preview note released on Feb 6, but 1.8% above Bloomberg consensus’ forecast and 3.6% higher than Reuters’ poll.

We expect planters to report weaker earnings, both quarter on quarter (q-o-q) and y-o-y, due to lower crude palm oil (CPO) prices and rising costs. The average CPO price fell 2% q-o-q and 24% y-o-y to RM3,910 per tonne in 4Q22, while the cost of production has risen due to the higher minimum wage since May 1, 2022, and higher fertiliser costs.

We expect CPO prices to trade in the RM3,700 to RM4,200 per tonne range this month. Key factors that are likely to drive prices include Indonesia’s decision to suspend some palm oil export permits to secure domestic supply amid rising cooking oil prices ahead of upcoming Islamic festivals. This is likely to limit the volume of palm oil exports from Indonesia in the coming months and will be supportive of CPO prices.

We expect CPO prices to soften in 2H23 and maintain our forecast of RM3,800 per tonne on average in 2023F. We maintain our “neutral” rating on the sector.

Target price: 85 sen  BUY

RHB RESEARCH (FEB 13): Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) results exceeded our expectations with its first profitable year since 2017. We are positive on the group’s outlook given its robust order book, which should provide exponential growth in earnings. We believe MHB is a beneficiary of the recovering oil and gas industry. The company declared a 1.5 sen dividend given its first profitable year since 2017.

The Kasawari jacket loadout is currently in progress while the topside is at 75.5% completion and its loadout is expected in 1Q23. The Jerun project (53.4% completed) is scheduled for completion in 3Q24.

MHB’s order book as at 4Q22 stood at RM6.3 billion, coming from its new order intake of RM4.9 billion. Its tender book is worth between RM10 billion and RM11 billion, with an 86:14 split between international and domestic jobs, for which about 60% of the bids are for non-oil and gas projects, predominantly in offshore wind.

MHB is in the midst of reactivating its east yard, with the anticipation of more jobs coming in. For its marine side, we believe the utilisation rate of its docks will remain high given the company’s new partnerships with Silverstream Technologies and Bureau Veritas Solutions to provide fuel saving solutions.

We increase FY23-FY24 forecast earnings by 10% to 32% on account of higher replenishment assumptions as well as introduce FY25 forecasts. Our forecast is on the conservative side compared with the consensus, although we do note that some brokers do not exclude impairment reversals, which have skewed the average to be higher. Key risks include a slowdown in order replenishment, higher material costs and labour shortages.

Target price: RM7.31  HOLD

MAYBANK INVESTMENT BANK (FEB 12): Malaysia Airports Holdings Bhd (MAHB) held an investor briefing to introduce its new operating agreement (OA). MAHB maintains that it is not worse off under the new OA and that the new OA offers it flexibility in financing its capex plans and ensures a return on its projects.

To be sure, the all-important letter has not been set or communicated to us yet. We maintain our earnings estimates, “hold” call and target price of RM7.31 until more details are revealed by end-1QFY23.

Under the 2023 Operating Agreement (2023 OA), MAHB will be largely responsible for both maintenance and development capex. The caveat for development capex is that it must be commercially viable for MAHB to do so. Otherwise, the non-commercially viable development capex will be carried out by the government or MAHB will be allowed to recoup the non-commercially viable development capex from the government.

Capex will be financed in a variety of ways, with returns set for 2023 OA, allowing MAHB to be flexible in sourcing capex financing. This includes drawing from the Airport Development Fund (ADF) and the Regulated Asset Base (RAB) model. On the ADF, MAHB may charge airport users and airlines ADF fees. Also, 50% of user fees derived from passenger service charges (PSC) will go toward the ADF. On the RAB model, there will be a spread between the allowed return on capital invested and the weighted average cost of capital for projects, but MAHB declined to state the spread for now.

In summary, MAHB maintains that the 2023 OA is no worse than the 2019 OA and that it will be at least neutral, if not positive, for the company.

MAHB did not state when the 2023 OA will take effect but we gather that it will be in 1Q24.

Target price: RM17.40  BUY

APEX SECURITIES (FEB 13): We initiate coverage on United Plantations Bhd (UPL) with a “buy” call and a target price of RM17.40. UPL is an integrated plantation company with upstream and downstream operations.

Despite crude palm oil (CPO) price tapering off after reaching its peak in April 2022, UPL’s share price is still sustaining quite well. We view this divergence positively as it shows its capability to withstand lower CPO prices better than other integrated producers.

UPL has a net cash of RM485.4 million based on the latest 9MFY22 quarterly results. If we were to include short-term funds as cash reserves, this would bring the company’s cash position to RM872.1 million.

As at FY21, 90% of UPL’s oil palm planted area has matured and the remaining 10% is still immature. We view the company as having an excellent tree age profile, with 82.7% of the planted area in the prime production tree age. We believe the fresh fruit bunch production yield should remain strong supported by the excellent mix of tree ages.

Despite having a 70% to 80% payout as a dividend policy, UPL is no stranger to offering special dividends. Consequently, this has pushed up the company’s payout ratio to close to 90% over the past three years. We expect the company to generate a dividend per share of RM1.13 for FY23E, implying a dividend yield of 7.2% at the current share price of RM15.76.

The stock is trading at an FY23 PER of 12.1 times, below those of its peers, which are trading at 16.5 to 19.3 times. We believe UPL could be rerated because it has stronger fundamentals such as higher margins, a decent yield, a cash-rich balance sheet and a leading productive yield.

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