ON Wednesday, the Malaysian Palm Oil Board released palm oil statistics for February. Production declined by 11.3 per cent month-on-month (m-o-m) and 1 per cent year-on-year (y-o-y). Exports were down 20 per cent m-o-m but up 2.4 per cent y-o-y. Stocks inched down by 1 per cent m-o-m.
Comment: The numbers would bring little cheer to the crude palm oil (CPO) market as they were generally in line with expectations. The production decline m-o-m was entirely within expectations as we are now in the middle of the low season.
The poor m-o-m export performance was due to lower imports by key buyers – India, Pakistan and the Middle East. Only China bucked the trend.
The closing stocks were still higher than the psychologically important 1 million tonne mark. The consolation was that the figure was lower than the 1.1 million forecasted by a private forecaster and as such, was likely to provide some support to prices.
CPO prices averaged RM1,628 per tonne for the first two months of 2003, against our full-year forecast of RM1,680. However, the prices have been rather weaker over the past two weeks, hovering at around RM1,500 due to disappointment over India's failure to reduce import duty on palm oil.
We maintain our forecast but there is downward risk if a war breaks out in Iraq. We also maintain our 2004 forecast of RM1,460.
We are however concerned that stocks are not falling as fast as we would like, given that we are in the lean production season.
And war may make it more difficult for ships to deliver palm oil to the Middle East with insurance and fuel costs likely to go up.
Recommendation: We downgraded the sector to neutral on concerns that a war on Iraq may exert further weakness in CPO prices as had happened during the US attack on Afghanistan. The dip could be temporary but it may be enough to force further liquidation, especially by foreigners.
Unisem (M) Bhd Consensus net profit estimate FY12/03: RM13.2 million
Between Feb 25 (when Unisem released its Q4 results) and March 11, the share price has plunged 30.5 per cent. In the same period, the KL Composite Index (CI) fell by 3.9 per cent. Average daily trading volume of Unisem shares has risen from 225 lots to 862 lots in recent weeks.
Comment: Unisem shares are currently trading well below its initial public offering price of RM5.10 and the price-to-book has fallen to 0.95x. We believe its price downside risk is now limited.
While we still expect the outlook for the semiconductor sector to be clouded by excess capacity, we note that US business inventories have declined to historically low levels.
Given this, inventory rebuilding through a recovery in tech capital expenditure can be expected very soon. This could be the news to bring life back to tech stocks in the event of a “relief rally”.
Recommendation: Given the extended “oversold” technical indicators, we are upgrading Unisem from underperform to market perform. The stock is also trading below its net tangible assets (NTA) of RM4.18 per share, a rare occasion since its listing in 1998.
We estimate that foreign ownership in the stock has fallen by about 14 per cent. While further foreign selling can be expected in the near term, we believe this may present buying opportunities for investors.
Hume Cemboard Bhd
Hume Cemboard (HCB) has recently completed the disposal of its building material business to Hume Industries (Malaysia) Bhd. The sale consideration of RM310 million cash works out to almost RM5 per HCB share.
Comment: HCB is essentially a cash-rich listing shell with no core business, and is hence in breach of Practice Note 10/2001 (PN10) due to inadequate level of operations. It has earlier proposed to return RM4 cash per share to shareholders, but the Securities Commission (SC) has declined to consider the proposal until HCB submits a detailed plan to comply with PN10.
In view of the SC's stipulation, there is minimal cash utilisation risk for HCB. In case it fails to find a new core operation, there is the option of de-listing and fully returning capital to shareholders. In such a scenario, one can expect RM5.29 per share. The risk is then one of timing.
There is also the possibility that the new business could be unexciting and as a result, the share price could fall below NTA (net tangible assets) post-cash distribution. If we assume that HCB trades at only half of NTA, we would be looking at about RM4.65 per share pre-cash distribution. This seems an overly pessimistic assumption.
If we attach a premium to its listing status, HCB would be worth more than its NTA. Given its small capital base, a RM10 million premium would translate to 16 sen per share.
Recommendation: We see HCB as a reasonable bet for investors with some patience. We believe it is a question of timing and would recommend that investors with medium-term holding power capitalise on weakness to gain exposure.
We note that HCB's major shareholder accumulated 2.5 million shares between February and July 2002, the bulk of them between RM4.30 and RM4.80. The last purchase on July 16 was at RM4.90. At current levels, investors would be entering at the low end of the major shareholder's recent purchase range.
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