• With markets in a liquidity-driven rally, we believe cyclical sectors like plantations could be the next play, providing investors with a relatively safe haven, in terms of earnings. Nevertheless, we caution of a possible pullback in CPO prices in 4Q20 and continue to advocate buying stocks which are still trading at decent valuations.
• We believe First Resources (SGX:EB5) is already trading at a relatively fair value, at its historical mean of 14x.
• Maintain NEUTRAL, with new SGD1.45 Target Price from SGD1.35, 4% upside.

CPO Prices Have Rallied of Late

• CPO prices have rallied of late to current levels of MYR2,739/tonne. While we do not see any significant catalyst that could have caused this rerating other than the recently released Malaysian plantation statistics – which were a positive surprise – we believe much of the rally could have been caused by the current liquidity in the market. This liquidity has cut across all asset classes – not just for equities, but also for fixed income and commodities.
• That said, we believe CPO prices are likely to hold relatively steady in 3Q20, given that CPO production only started ramping up in June, while pent-up demand is likely to continue until at least August or September, in light of the Deepavali festival in November.

4Q20F Should See a Pullback of Prices

• Post-3Q20, we continue to hold our view that 4Q20F should see a pullback of prices on the back of the impact of the seasonal peak production which will end in 4Q20 and lower post-festive demand.
• On the whole, however, CPO prices in 2020 are expected to be 13% higher than that of 2019, while production for most planters, particularly those in Indonesia, will be higher. This means earnings will be stronger y-o-y in 2020, as well as in 2021, given our assumption of a higher MYR2,500/tonne CPO price. This security of earnings, we believe, will give investors a reason to invest in the sector – provided that valuations make sense, of course.

Maintain NEUTRAL

• Extending our investment horizon in line with market expectations, we roll forward our valuation period to Dec 2021F from Jun 2021F for all the stocks under our coverage, while mostly keeping our valuation targets intact.
• Maintain NEUTRAL on First Resources as we believe it is currently trading at close to its historical mean. We revise our Target Price to SGD1.45, based on an unchanged 14x P/E, and apply to FY21F earnings.

Source: RHB Invest Research - 27 Jul 2020