Credit Suisse maintains Underweight on plantations

KUALA LUMPUR: Credit Suisse Research maintains its Underweight stance on PLANTATION []s due to the rich valuations and also its bearish outlook for palm oil prices in the short term.

At 3.51pm on Tuesday, June 21, Kuala Lumpur Kepong share price was down 18 sen to RM21.92, Sime Darby was unchanged at RM9.19 and IOI Corp inched up two sen to RM5.30.

“Our key Underperform calls are on IOI Corp (target price RM5) and Sime Darby (TP RM8),” it said on Monday, June 20. As for KLK, it was Neutral on the stock and had a TP of RM21.70.

The research house said corn prices have fallen 10% over the past week and it believed this had dragged palm oil prices. The palm oil futures are now closer to RM3,200/tonne (19% below the peak of RM3,930 in mid-February 2011).

“Historical trends suggest that corn, soyabean and palm oil prices are highly correlated. Corn and palm oil prices have a correlation factor of 79%, 77% and 78% over a one-, three- and five-year period, respectively. If corn prices continue to fall, palm oil prices would also weaken,” it said.

Recently, the US Senate’s vote ended three decades of ethanol subsidies.

Effective from July 1, ethanol tax credits of 45 cents per gallon have been removed.

Credit Suisse Research said the mandated level of ethanol is 12.6 bn gallons in 2011. However, given the current incentive for refiners to blend ethanol, current ethanol demand and production is expected to be 13.8 billion gallons, or 1.2 billion above the mandatory blend.

If the tax credit is scrapped, this would reduce margins for refiners and reduce, although not remove, the incentive for blending more ethanol. Weak crude oil price has also not helped, it said.