KUALA LUMPUR: Sime Darby Plantation Bhd (SD Plantation) offers defensive qualities such as land rich balance sheet and decent gearing, and is a beneficiary of food inflation as edible oils and fats prices have risen substantially compared to a year ago, Kenanga Research said.
The firm expects the supply of the world's leading vegetable oils, palm and soybean to pick up seasonally in the second half (2H) of 2022.
This, in turn, should exert some downward pressures on prices, it said in a note today.
However, Kenanga Research said palm oil prices were likely to stay relatively firm on the back of several supportive factors.
These included the tight worldwide edible oils and fats market, the low inventories of sizeable palm oil users such as China along with possibly India and Pakistan as well as the rising demand for biofuels.
Kenanga Research has maintained SD Plantation's average crude palm oil (CPO) price at RM4,000 per tonne for the financial year ending December 31, 2022 (FY22) and RM3,500 for FY23 but nudging up palm kernel prices by 18 per cent and eight per cent respectively.
"However, we are increasingly doubtful that the arrival of new guest workers can adequately meet 2H 2022 peak harvesting needs.
"As such, we are toning down fresh fruit bunch (FFB) output by about five per cent, partly to reflect lower Malaysia production but also the poorer Indonesian harvest in the first quarter (Q1) 2022," it added.
Meanwhile, Kenanga Research said SD Plantations' Q1 core net profit of RM807 million came within its estimates but exceeded consensus by 10 per cent.
"The strong performance was underpinned by strong palm product prices while production was weaker quarter-on-quarter as well as year-on-year," it said.
"We are adjusting up FY22-FY23 core earnings per share by one per cent and five per cent, respectively, on firm palm prices staying longer," it said.
Kenanga Research has maintained its "market perform" recommendation on SD Plantation, with an unchanged target price of RM5.25.