Value in plantation stocks

Analysts starting to see value as CPO demand expected to outstrip supply

Plantation analysts are starting to see the value in plantation stocks on the back of crude palm oil demand outstripping supply next year.

PETALING JAYA: With crude palm oil (CPO) prices down by some 50% since the start of 2011, plantation analysts are starting to see value in plantation stocks as demand is expected to outstrip supply next year and as the peak production of CPO coming to an end in November.

Analysts are beginning to recommend their clients to accumulate on dips. Top picks by analysts include Sime Darby Bhd, IOI Corp Bhd, Genting Plantation Bhd, IJM Plantation Bhd and TSH Resources Bhd.

The three-month CPO price, now at RM2,500-per-tonne level, have been on a virtual downtrend since starting off the year at the RM3,000-per-tonne level. It hit one of its lowest levels since Nov 2009 at RM2,230 on Oct 3.

Analysts expect production to peak in November before normalising to regular levels.

Coupled with low CPO prices, they feel that the downside for plantation stocks would be increasingly limited.

Nonetheless, should palm oil prices not climb back to the RM3,000 levels, earnings of planters may be affected, particularly those that were not integrated players.

“It’s yet to see how the thirdquarter earnings are going to be like because while CPO prices have come down, production has picked up. So there is a possibility that the pick-up in production can somewhat buffer the lower CPO prices, although not completely,” said a plantation analyst with a local research house.

In the longer term, though, if CPO prices stayed put below RM3,000, this would negatively affect earnings and eventually result in a series of downgrades by analysts.

An analyst with a local bank said while CPO prices had tumbled badly, the same could not be said about the prices of plantation stocks.

“Most plantation stocks have not taken a hit despite the fall in CPO prices. There is a concern that plantation stock prices may eventually reflect this fall,” he said.

The analyst added that plantation stock prices had remained the same even when CPO prices were at the RM3,000-RM3,500 level.

“Thus, I don’t expect to see a selloff, particularly since CPO prices are expected to recover soon. There appears to be more upside than downside and I would recommend clients to start accumulating,” he said.

“In the case of Genting Plantation, IJM and TSH, only half of their plantations are matured. So, intuitively, production should double over the next few years and this will be reflected in their earnings. The increase in production will also compensate for volatility in CPO prices.”

In an Oct 16 seminar organised by CIMB, prominent industry speaker Dorab Mistry said the three-month CPO futures price needed to fall to RM2,200 per tonne and stayed there for four to six weeks to flush out the excess palm oil stocks in the system.

If prices failed to decline to that level, Malaysian palm oil stocks could rise to three million tonnes or more by end-December, Dorab said.