US Bank Citigroup has maintained its stand that investors should sell shares of IOI Corp Bhd (1961), Kuala Lumpur Kepong Bhd (KLK) and IJM Plantations Bhd because they are already expensive relative to their forecast earnings.
It also downgraded Sime Darby Bhd to “hold” from “buy”, having considered the conglomerate’s valuations no longer compelling.
“An attractive feature of Sime Darby was its dividend yield. But with the recent share price rally, dividend yield is close to only 3 per cent currently,” Citigroup said in a research note to investors.
Malaysian plantation stocks are highly valued, thanks to buying from local funds.
Foreign shareholdings for Sime Darby and KLK are still below below 15 per cent of total shareholding.
With the rise in palm oil prices over the past two months, price to earnings (PE) of Malaysian plantation counters are now above or at historical averages.
The research house expects palm oil prices to stay flat in the near term.
Following the recent rally in IOI Corp’s share price, Citigroup said there are not many near-term catalysts for the stock.
IOI is currently trading above its historical average PE of 14.4 times.
It also expects IOI Corp’s earnings per share to be diluted by 6 per cent due to the increase in the its share base following a massive rights issue.
The proposed rights issue is expected to be completed at the end of this year.
Investors can find better value in other purer plantation companies that are trading at lower PEs like IJM Plantations, Citigroup said.
The stock is fairly valued at RM2.75. It maintained a “sell” call on KLK, but raised its target price to RM10.69 from RM10.39.
Contribution from KLK’s manufacturing division especially the non-oleochemical operation, ranging from vitamin-E extraction, gloves and parquet flooring will continue to disappoint.
However, it is unlikely to sell these businesses in the near term. “We are forecasting RM80 million loss (for KLK) in the current financial year, after factoring in store closures and inventories write-down,” it said.
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