Trade War ≠ Trade Woes - RHB
Upgrade to OVERWEIGHT, Top Picks: KLK, AALI and First Resources. Our contrarian view is premised on the expectation that CPO prices are likely to rerate upwards in 4Q19 and continue rising in 1H20. As such, we believe plantation stocks will also likely rerate on this price movement. Historically, CPO prices are the leading indicator for plantation companies’ P/Es.
When CPO prices start moving, plantation companies’ P/Es will expand first, before earnings catch up and valuations return to normal. As such, we lift our target P/Es for the stocks under our coverage by 2-5x to trade at 1SD above their historical averages. We expect plantation stocks to trade at more inflated valuations in the short term, before earnings start improving.
We maintain our CPO price assumptions of MYR2,200/tonne for 2019 and MYR2,400 for 2020.
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