Regional Plantation Stocks - UOB Kay Hian 2023-05-22: Industry Enfeebled By Sick Trees

• CPO prices could resume an uptrend once the market realises that palm oil supplies would be tight going into 2H23 and even in 2024. Based on our recent ground checks, oil palm trees are “very sick” after three La Nina events, having been under-fertilised for the last 3-4 years and subjected to poor agromanagement.
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• Maintain MARKET WEIGHT.

Potential upside for CPO prices with lower-than-expected supply growth.

• Regardless of the severity of El Nino in 2023, we still expect the dry weather that palm oil-producing countries are experiencing to be the straw that breaks the camel’s back. This is due to the continuous disruption caused by:
  1. three years of La Nina (high rainfall),
  2. flooding in some estates, and
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• – These have affected FFB yields and will continue to do so until 1H24.
• Plantation companies’ share prices could outperform on the back of:
  1. Better 2H23 earnings with margin expansion arising from potentially higher CPO ASPs and lower cost of production.
  2. Fertiliser costs having plummeted 40-50% from end-Dec 22. With both fertiliser and fuel costs trending down, we expect better margins in 2H23.
  3. CPO prices potentially recovering from the current low to trend higher. The key catalyst to this is palm oil supply coming in lower than market expectation in 2H23 and potentially in 1H24.
• We are still maintaining our CPO price assumptions for 2023 and 2024 at RM4,000/tonne, but foresee CPO price upside. Assuming CPO realised prices are higher than expected at RM4,200 and RM4,500 in 2023 and 2024 respectively, sector earnings could rise 18% and 45% respectively. Based on our sensitivity test, Astra Agro Lestari, Bumitama Agri and Genting Plantations would suffer the highest earnings impact.

Maintain MARKET WEIGHT.

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Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2023-05-22 SGinvestors.io

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