Thu 6 Dec 2018
Plantation stocks have fallen out of favor for some time as crude palm oil (CPO) price went on a downtrend. If you are an elite trader, you would probably have sold plantation stocks in your portfolio some time back. The interesting question is now whether you should buy them back and when.
Let’s look at the fundamentals of the sector. A research house has only just recommended an Underweight on the sector. It believes that 4 primary issues will likely play out in 2019, hence exerting downward pressure on the CPO price.
These factors are likely sluggish export demand, higher CPO inventory due to ample supply and expected a pick-up in demand in other oilseed substitutes, the bearish soybean and soybean oil prices resulting in CPO losing its competitiveness and escalating trade tension between US and China – further dampening vegetable oil prices, therefore, impacting CPO price.
The research house also pointed to the fact that the recently concluded corporate earnings seasons was disappointing for plantation companies. Among 11 plantation companies under its coverage, only one beat its expectation while a total of 8 companies missed its earnings targets.
It believes that plantations companies are at risk of further earnings disappointment in 4Q 2018 as the average CPO price realized for these companies could be below RM1,900/MT and production is unlikely to grow higher than last year.
In fact, it expects the forecast earnings growth for plantation companies to be a mixture of positive and negative growth in 2019, averaging at -5.5% YoY (year-on-year).
Valuation-wise, the research house noted that the Plantations Index currently trades at 30x, above its 5-year historical average price-earnings ratio (PER) of 25x.
Plantation Stocks Outlook
Plantation stocks prospects and sentiment largely hinge on the movement of CPO price, which like most other commodities, have been on a downtrend this year. However, commodity prices are cyclical and tend to overshoot both on the upside and downside.
Hence, one should track the outlook for both CPO prices and its competing soft commodities prices such as soyabean oil, rapeseed oil, etc. The current US-China trade war has depressed soyabean and soyabean oil prices but their downtrend may be reversed if the situation is soon resolved.
Soft Commodities Outlook
When would you know when such commodity prices will rebound so that you can get in at the early at the bottom and leverage their rebound on plantation stocks as well?
Is the downtrend nearing the end just as everybody starts to get really bearish on the sector or will 2019 sees more weakness in commodity-related stocks?
The mPower Algorithm tracks global commodity prices closely and we are seeing a very clear trend moving now in some of the main commodities. Is the CPO price one of them?
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