This article first appeared in The Edge Malaysia Weekly on February 28, 2022 - March 6, 2022

PLANTATION stocks have stirred at last.

Although crude palm oil (CPO) prices have been on an upward trend since last year, the share prices of Malaysian plantation companies have lagged behind the commodity’s rally, with environmental, social and governance issues (ESG) cited as the main cause.

In the past two weeks, however, plantation stocks have been on an upward trend. The Bursa Malaysia Plantation Index shot up 19% to 7,870.04 points last Wednesday, in line with CPO prices as the prospect of potential profits overrode ESG concerns.

Over the same period, the May 2022 contract gained 12% to RM5,982 per tonne. The full-scale invasion of Ukraine by Russia pushed the price of the CPO contract for March 2022 beyond RM7,000 per tonne last Thursday for the first time ever, while the May contract, which is the most active contract, shot up to RM6,453 per tonne.

Private investor and former investment banker Ian Yoong says that foreign funds have been buying plantation and other commodity-related stocks this year, with local funds following suit.

“This is due to asset reallocation by foreign funds, which sold down holdings in the US and are increasing the weighting of cyclical and emerging market equities. Earnings growth for plantation stocks in 4Q2021 has been very impressive. Average CPO price surged to the quarterly average price of RM4,100 per tonne in 1QFY2022, from RM2,700 per tonne in 1QFY2021,” he tells The Edge.

TA Investment Management chief investment officer Choo Swee Kee says that the better profits posted by the plantation players on higher CPO prices are probably driving the interest in plantation stocks now.

“The purported ESG issues have not changed but are probably being conveniently set aside as investors look at the potential profits the planters can earn and the implication for share price appreciation,” he tells The Edge.

Etiqa Insurance & Takaful chief strategy officer Chris Eng agrees that the appreciation in the planters’ share prices is an indication that investors are looking past ESG issues. But he points out that the companies are making serious efforts to solve these issues, in particular the social component, which involves the important issue of labour.

“As to their share prices with oil reaching multi-year highs, investors seem to have shrugged off their concerns over commodity players and come back into the segment,” he tells The Edge.

Labour issues involving migrant workers have been a sore point for Malaysian companies of late. In January, the US Customs and Border Protection (CBP) determined that certain palm oil products of Sime Darby Plantation Bhd are produced using convict, forced or indentured labour, and issued a forced labour finding against the company. As a result of the finding, the CBP said that it would seize palm oil products exported by Sime Darby Plantation at all US ports of entry. The finding follows a Withhold Release Order (WRO) that the CBP issued to Sime Darby Plantation in December 2020.

In September 2020, the CBP issued a WRO on another plantation company, FGV Holdings Bhd, on the grounds of forced labour practices by the company. With the WRO, an importer has three months to prove that there are no indications of forced labour, and is even given an option to re-export the goods brought into the US. But if issued a forced labour finding, the importer’s goods are seized upon entry into the US.

A quick look at 18 plantation stocks with a market capitalisation of above RM500 million shows share price gains of between 3% and 37% over the past two weeks.

Shares in Boustead Plantations Bhd appreciated by 37% to RM1.07 last Wednesday. For its financial year ended Dec 31, 2021 (FY2021), the group posted a record revenue of RM1.1 billion, while net profit grew more than five times to RM241.29 million.

Based on its share price of RM1.07, Boustead Plantations’ trailing 12-month (TTM) dividend yield is 4.5%. Maybank Investment Bank (Maybank IB) says in a note published last Tuesday that if Boustead Plantations maintains its 60% dividend payout ratio on realised profit after tax and minority interest, its net dividend yield could hit 15% for FY2022. Boustead Plantations’ share price has already surpassed Maybank IB’s target price of RM1.03.

Sime Darby Plantation gained 30% to RM4.65. The group reported a bumper financial performance in FY2021, with net profit surging 90.46% year on year to RM2.26 billion, while revenue grew 42.92% to RM18.7 billion. Hong Leong Investment Bank in a Feb 21 note maintained its “buy” call on Sime Darby Plantation with a target price of RM5.95 as the stock remains one of its top picks for the sector owing to its high operating leverage to CPO prices. Sime Darby Plantation’s TTM dividend yield is at 3.2%. Another top analyst pick is Kuala Lumpur Kepong Bhd (KLK), whose share price jumped 20% to RM25.40. The group reported a 68% y-o-y increase in net profit in 1QFY2022 to RM599.32 million, while revenue surged 59% to RM6.83 billion.

CGS-CIMB Research in a Feb 17 note raised its FY2022 to FY2024 net profit forecasts for KLK to reflect higher CPO price assumptions and contribution from its manufacturing divisions. It reiterated its “add” call on the stock with a target price of RM29.57. At its closing price of RM25.40 last Wednesday, KLK’s TTM dividend yield stood at 3.94%.

Hap Seng Plantations Bhd, whose share price gained 8% to RM2.35, is a top pick of private investor Yoong.

“Hap Seng Plantations offers exceptional value at 8.3 times TTM (price-earnings) and at 10 times for FY2022. Dividend yield at 3% is attractive and expected to improve in FY2022 to an estimated 4.5%.

“Hap Seng Plantations is the purest proxy to the CPO price rally. Management is honest, experienced and capable,” he tells The Edge.

Is the CPO rally sustainable?

Last Thursday, the CPO contract for March crossed the RM7,000 mark for the first time ever to trade at RM7,093 per tonne after Russia invaded Ukraine.

The movement of CPO prices, like all other commodities, is in line with crude oil prices, explains Singapore-based Dr Sathia Varqa, owner and co-founder of Palm Oil Analytics, an independent online publisher of palm oil market news.

“Given that Russia is the second largest crude oil exporter after Saudi Arabia, the geopolitical tensions raise the risk of supply disruptions just as economies around the world are opening up. Crude oil prices are also closely related to [prices of] soybean oil given that around 40% of US soybean oil supply is used in blending to make biodiesel.

“Higher crude oil lifts biodiesel prices and hence the feedstock soybean oil prices. The price dynamics governing soybean oil, canola, sunflower oil and CPO are all related. Sunflower oil prices have been rising too but at a relatively slower pace than CPO given the uncertainty of overbooking sunflower oil for fear of supply delivery in the event of a war, [as] Ukraine is the largest global supplier of sunflower oil,” he says.

Varqa expects the front month contract for CPO to ease to RM6,000 per tonne and the active month contract to trade below RM5,000 in the second half of the year on the assumption that CPO production picks up pace in Malaysia.

“This is also premised on the assumption that more Indonesian exporters receive export permits and crude oil [trades below] US$100 per barrel, and interest rates are raised from the current levels,” he says.

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