Neutral to underweight outlook for plantation


  • Business
  • Monday, 02 Feb 2004

BY Hanim Adnan

DESPITE the current steady spot crude palm oil (CPO) price above RM1,800 per tonne, several research houses are downgrading their plantation sector outlook this year to either neutral or underweight from its overweight position previously. 

Plantation analysts expect the sector to continue experiencing buoyant CPO prices in the short term, but it offers unexciting stock price prospects. 

JPMorgan Asia Pacific Equity Research, in its notes on Jan 28, downgraded the plantation sector to underweight. 

“We expect palm oil prices to rally from current levels and find peak in the next one to two months to perhaps near RM2,000 per tonne,” it said. 

Beyond that time horizon, JPMorgan expects palm oil prices to start trending downwards as India's palm oil imports would decline this year, following a recovery in the country's domestic oilseed production. 

The research unit said: “We believe share price performance in the sector is nearing an end.”  

While there could be further upside to share prices from current levels, JPMorgan expects this could be limited to 5% -10%. 

“Hence, we believe the risk/reward ratio favours an early exit from the sector,” it added. 

In terms of stock picks, JPMorgan has downgraded IOI Corp Bhd and Kuala Lumpur Kepong Bhd (KLK) to underweight from neutral, and PPB Oil Palms Bhd to neutral from overweight.  

In the sector, the research unit recommended a switch to IOI Oleochemical Industries Bhd, a “perceived” counter-cyclical play, and Island & Peninsular as a restructuring play. 

Affin-UOB Securities said in its 2004 Stock Market Outlook that looking forward, plantation companies would continue to reap healthy earnings. 

“Our forecasts assume an average CPO price of RM1,500 per tonne this year and RM1,300 next year against average production costs of RM600 to RM800 per tonne,” it said. 

However, unless the South American harvests come in below expectations, interest in the plantation sector is likely to wane again. Hence, Affin-UOB Securities has downgraded the sector from overweight to neutral. 

The plantation industry currently enjoys an unexpectedly strong run-up in CPO prices due to the shortfall in the US soya bean harvests.  

Until the Latin American crops come in by March or April this year, the present tightness in world edible oil supply is likely to persist. 

The research unit's favourite stock pick is IOI Oleochemical, which has an integrated earnings model well cushioned from the CPO price swings.  

However, Affin-UOB Securities is downgrading IOI Corp, KLK and PPB Oil Palms to neutral from buys. 

Meanwhile, AmResearch has recommended neutral on the plantation sector in its 2004 Sector Outlook & Recommendation report. 

The only stock which the research unit has placed a buy is PPB Oil Palms. “The reason is that PPB Oil Palms is currently only selling its output about one to two months' forward, unlike all other plantation companies under our coverage which are selling between three and six months' forward.” 

This could potentially mean that PPB Oil Palms' average CPO selling prices for financial years 2003-2004 could be higher than other companies. In addition, given its pure plantation company status, earnings could surprise on the upside. 

AmResearch is of the view that CPO prices should remain stable at current levels of between RM1,600 and RM1,800 per tonne in the first half this year.  

Supporting this stability would be the continued disparity between soya oil and CPO prices and the low palm oil stocks in Malaysia.  

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