Maybank Kim Eng also suggests focusing on small firms such as Sarawak Oil Palms and Boustead Plantations.
“We believe Budget 2017 announced a mandate to fund proper research for small-cap to mid-cap stocks in 2017 [and it] will benefit the non-large cap plantation stocks, given their valuation gap.”
Its sector “buys” are Sarawak Oil Palms and Boustead Plantations. Boustead Plantations, for example, has a high dividend yield of 7.8%.
While Maybank Kim Eng has no “buy” recommendations among the large caps due to their steep valuations, it believes Sime Darby offers the best trading opportunity in the first half of 2017 due to its liquidity, good proxy to the recent CPO price rally and ongoing initiatives to enhance shareholders’ value.
Higher cost of production
JF Apex Securities, in its 2017 outlook report, has estimated the year’s CPO average price at RM2,580 per tonne.
“We expect the CPO average selling price in the first half […] to be at RM2,818 per tonne. It will range from RM2,637-2,921 per tonne in view of the persistent low inventory level despite gradual recovery of production from the weak spell.
“We anticipate inventory levels to stock up in the second half as a result of recovery from the weak spell effect on production, coupled with seasonal higher production […].”
It points out that the profit margin in the plantation sector notched up 50 basis point in 2016 compared with 2015.
“Looking forward, we expect margins to remain at the same level after taking account [of the] slight increase in CPO average selling prices [this year] despite recovery in production, coupled with higher fertiliser cost in view of a weaker Ringgit and a full-year impact of the minimum wage.”
The minimum wage implemented on July 1 last year is RM1,000 for Peninsular Malaysia and RM920 for Sabah and Sarawak. JF Apex says this will put pressure on the manpower-driven plantation sector and erode margins.
Another factor to pressure planters’ margin is the higher fertiliser cost, with a weak Ringgit that is floating around RM4.35 to the US Dollar.
“As the fertiliser cost makes up 25-50% of palm oil production costs, the weaker Ringgit has lifted the cost of production in plantation companies, exerting downward pressure to the margins,” adds the brokerage.
Source: The Star, Jan 7, 2017
This is an edited version of the article.