Focus Market finally bullish on plantation stocks

by **Cals** Thu 28 Nov 2013, 18:37

Focus Market finally bullish on plantation stocks

Business & Markets 2013

Written by Jenny Ng of theedgemalaysia.com

Thursday, 28 November 2013 15:55

THE HIGH VALUATION of Malaysian plantation counters compared with their historical trading range has not deterred investors from ploughing money into the stocks as crude palm oil (CPO) prices trend higher. With production going into the low season, weather factors and the acceleration of biodiesel mandates in Malaysia and Indonesia, CPO prices could move higher, observers say.

Dr James Fry, chairman of LMC International Ltd, a consultancy for agribusiness, forecast that the CPO price could reach RM2,700 per tonne by March or April next year. He sees a number of key factors influencing CPO prices.

“Number one, obviously inventories are lower than expected earlier, that’s why there was a pickup ... and then there was the biodiesel announcement in Indonesia,” he says.

Palm oil inventory in Malaysia came in within market expectations in October, rising 3.5% to 1.85 million tonnes from the month before. A year ago, the CPO stock level was at 2.5 million tonnes. Meanwhile, production slowed to 3.1% compared with 10.2% in the previous month.

In Indonesia, under the Energy and Mineral Resources Ministerial Regulation, various sectors including transport, industry and energy, raised their minimum use of biodiesel in September. For power generators, for example, biodiesel usage is at 7.5% and will rise to 20% next year. Biodiesel usage for private vehicles is at 3% — next year, it will rise to 10%.

Earlier in his presentation at the Palm Oil Refiners Association of Malaysia (Poram) annual forum, Fry pointed out that the large increase in Indonesia’s biodiesel mandate suddenly added US$120 to CPO prices.

A third factor, he says, is the weaker support for biodiesel from the US and the European Union, which would narrow oilseeds’ premium over CPO, making the former more competitive.

“If you look historically, when the gap gets narrower, users switch for food away from palm to these other oils. That’s what’s going to slow the decline in palm oil stocks,” Fry tells The Edge.

So while there is upward pressure on CPO prices, it will be limited by the switch to oilseeds.

“I’ll probably say on the basis of everything we know now, it could probably go a bit higher. But all the time, you have the seed oils limiting it. It could go higher, it’s likely to go higher but I’m only looking six months out,” he adds.

Fry also highlights in his presentation that poor rainfall in important production regions in Indonesia has affected production this year and this is expected to spill over to 2014.

The CPO third-month contract is already trading close to RM2,700 per tonne at the time of writing, rising 23.5% from a low of close to RM2,100 in July. Over the last one year, CPO futures have been trading at an average of RM2,393 per tonne.

At the China International Oils and Oilseeds Conference two weeks ago, Dorab Mistry, director of Godrej International Ltd, said CPO may trade between RM2,400 and RM2,600 in the coming months, reversing his bearish outlook earlier following lower output by major producers during the high production cycle.

Tan Chee Tat, investment analyst at Phillip Futures Pte Ltd, says he has turned from bearish to bullish on CPO after prices broke through the RM2,500 level. He sees prices supported at this level and expects resistance now at RM2,700 to RM2,800.

“In terms of the fundamentals, CPO is also turning bullish,” he says, pointing to the start of the monsoon affecting production while on the demand side, he sees restocking in China ahead of the Chinese New Year festivities.

Typhoon Haiyan, which destroyed a sizeable area of coconut crops in the Philippines — the largest exporter of coconut oil — has also pushed CPO prices higher. Coconut oil has risen 38% to a high of US$1,380 per tonne on Nov 14 from Nov 4, just before the typhoon made landfall in the Philippines.

Although CPO is not a substitute for coconut oil for industrial use, palm olein may be used in place of coconut oil in cooking.

In fact, among the oil complexes, palm kernel oil — which is also a lauric oil like coconut oil — is looking the most bullish, says Fry.

As for plantation stocks, although they look expensive compared with their historical price-earnings ratios, investors are undeterred judging by the rise in these counters, which has caused the PERs to go even higher. The rising valuation may also be due to the fact that not all analysts have upgraded their CPO price assumptions.

Genting Plantations Bhd, for example, is trading at a forward PER of 20.9 times compared with its historical average of 18 times, according to Bloomberg data. TSH Resources Bhd is trading at 18 times compared with its historical average of 15.4 times while Kuala Lumpur Kepong Bhd is trading at a PER of 22 times compared with its historical average of 20 times.

Singapore-listed plantation related counters have also been seeing interest. First Resources Ltd is trading at 12.4 times compared with its historical average of almost 10 times. Golden Agri-Resources Ltd is trading at 13 times compared with its historical average of 6.7 times.

As for price assumptions, RHB Research says in a report on Nov 12 that there is upside risk to its CPO price assumption of RM2,600 for 2014.

“This hinges on the execution of Indonesia’s mandatory biodiesel programme, which is expected to use up three million tonnes of palm oil. Should three million tonnes be consumed for biodiesel, Indonesia will have less palm oil available for export next year. This will create upward pressure on the price as palm oil consumption for food will continue to grow regardless of prices,” it says, adding that it will revisit its price assumption should the CPO clear the RM2,600 level convincingly.

This article first appeared in The Edge Malaysia Weekly, on November 25, 2013.