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RPT – Buy or Sell – Can S. E. Asian palm oil stocks retain their gloss?

Posted on: June 16, 2009


Reuters – Wednesday, June 10

(Repeats story that ran late on Tuesday with no changes to text)

* Benchmark CPO futures nearly double from October’s prices

* CPO prices seen averaging 2,200 rgt/tonne in H2

* Palm oil stocks have had strong run this year

By Julie Goh

KUALA LUMPUR, June 9 – Shares of Sime Darby <SIME.KL>, Wilmar <WLIL.SI> and other Southeast Asian palm plantation companies have rallied this year as crude palm oil prices have rebounded from lows hit in October.

Strong Chinese and Indian demand for oilseeds and edible oils and curtailed supply have driven the revival in CPO prices. But with valuations looking stretched — shares in the sector are up as much as 75 percent this year — and future prices dependant on the vagaries of the weather, are investors on a slippery slope?

DIMINISHING WEATHER IMPACT

Yes, said UBS analyst Alain Lai, who has an “underweight” rating on the sector.

A lack of supply from Indonesia and Malaysia, the world’s top two CPO producers, due to “tree stress” and lower soybean oil supply from Argentina, the largest producer of soybean oil, have aided prices of CPO, which is used widely as a cooking oil in Asia and also as a key ingredient in food processing.

Palm oil is a cheaper substitute for soybean oil and enjoys rising demand if the supply of the latter falls.

But Lai and some other analysts say these factors are expected to stabilise in the coming months as the soybean harvest is over and the current tree-stress cycle reaches its end.

“These factors will have a diminishing effect on edible oil prices in the coming months,” Lai said.

Unfavourable weather conditions this year have played a key role in pushing up the price of edible oils by reducing supply. But there are mixed views on that continuing.

“The weather will be the key price-determining factor in the next few weeks and months,” said Merrill Lynch analyst Jeffrey Ng, who has underperform ratings on Malaysia’s Sime, the world’s largest listed palm oil firm, and its smaller rivals Kuala Lumpur Kepong <KLKK.KL> and Asiatic <ASIA.KL>.

Prices of CPO have almost doubled from 1,300 ringgit per metric tonne in October but are still down more than 40 percent from last year’s peak — a record 4,486 ringgit in March 2008 — due to the global financial crisis.

Malaysian planters expect them to trade at around 2,200 ringgit a tonne in the second half. Benchmark CPO futures <KPOc3> on the Malaysian derivatives exchange are currently trading at around 2,466 ringgit a tonne.

For a related factbox, see [ID:nKLR462017]

Malaysia, Indonesia and Singapore are the only markets in the world where stocks of palm plantation companies are traded. They make up nearly a fifth of the Malaysian market’s $234 billion capitalization.

Shares of Malaysia’s IOI Corp <IOIB.KL> have risen 31 percent this year, while Sime has gained 34 percent. Singapore’s Wilmar has jumped 75 percent and Indonesia’s Astra Agro Lestari <AALI.JK> is up 59 percent.

For a graphic on how some of the stocks have performed, click on http://graphics.thomsonreuters.com/069/MY_PLMPRF0609.jpg

Sime trades at 21.5 times 2009 earnings and Wilmar at 14.7 times. By comparison, the broader Malaysian market trades at about 13.4 times estimated earnings.

SUPPLY TO TIGHTEN?

But valuations are still lower compared with the price-earnings ratios that ranged between 25 and 82 times during the sector’s last boom in 2006.

“We are looking at palm oil stocks opportunistically, where in terms of valuations, they still present an upside,” said Raymond Tang, chief investment officer at CIMB-Principal, one of the largest money managers in Malaysia, overseeing $5.5 billion.

RBS analyst Nirgunan Tiruchelvam, who has an “overweight” stance on palm plantation stocks, also saw pressure on supply due to dry weather conditions aggravating “tree stress”, a condition that sharply reduces yields of palm trees after a bumper harvest.

“We expect a severe tightening of palm oil supply,” he said.

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