Cautious start for plantation stocks

BY Hanim Adnan

PLANTATION stocks would likely kick off on a cautious note in the New Year amid crude palm oil (CPO) prices coming down from their highs, and a bumper soybean harvest in the United States on the back of high stocks and increasing output by global producers. 

With CPO prices quoted in US dollars, market players also expressed concern that the sector could be severely affected should the ringgit be re-pegged higher.  

An analyst with MIDF Sisma Securities said current bearish factors could drag CPO prices lower. He sees earnings among top plantation companies slowing by 1.1% this year. 

But, another plantation analyst said players like IOI Corp Bhd, Asiatic Development Bhd and PPB Oil Palms Bhd could possibly register between 3% and 4% earnings growth next year based on their internal acreage expansion programmes.  

Top plantation stocks closely monitored by both local and foreign research houses include IOI Corp, Golden Hope Plantations Bhd, Kuala Lumpur Kepong Bhd, PPB Oil Palms and Kumpulan Guthrie Bhd. 

The region-wide tsunami-related devastation on Dec 26 has raised expectations that CPO prices may strengthen owing to disruption of supply in Indonesia. The MIDF Sisma Securities analyst however believed a disruption would be short lived, and a significant increase in the price of CPO unlikely. 

The price of CPO has not appreciated since the tsunami struck, with the spot price closing below RM1,400 a tonne last week.  

During the year just ended, many plantation companies registered handsome profits, and made good dividend payouts to investors.  

Plantation analysts said most pure plantation players managed to sell forward at much higher CPO prices, between RM1,600 and RM1,700 a tonne, compared with the 2003 average of RM1,544.  

The price of CPO, which reached a high of RM2,000 a tonne in April last year, has weakened to about RM1,400 currently, following the high domestic palm oil stock level (at 1.41 million, the highest since February 2001), signs of El Nino, and US record soybean harvest (3.15 billion bushels). 

A plantation analyst with a Singapore-based research house said: “The average CPO price is expected to slip by 14% to RM1,400 a tonne this year, from the estimated average of RM1,620 last year, as strong global oilseed prices had prompted farmers to raise planting activities globally.”  

(The CPO price forecast, however, had not factored in the potential adverse weather conditions in major planting areas, or the impact of Asian rust fungus in US soybean growing areas). 

Analysts said last year also saw many plantation giants undertaking corporate exercises – the ones coming to mind being the merger and acquisitions (M&A) activities to consolidate Permodalan Nasional Bhd plantation entities GHope, Island & Peninsular Bhd and Guthrie, Guthrie's stalled merger exercise with Guthrie Ropel Bhd and Highlands and Lowlands Bhd, IOI Corp's RM1.3bil bond-raising exercise, plantation assets merger between Tradewinds (M) Bhd and Johore Tenggara Oil Palm Bhd, and downstream activities expansion by Felda, PPB Oil Palms and KL Kepong. 

Despite the bearish scenarios painted of the plantation sector, MIDF Sisma Securities said: “Those who wish to have some position in the sector, should look at IOI Corp, said to be the best bet.” 

Mayban Securities concurred that the stock offered one of the best exposures, given the group's well-diversified plantation operations, and continued speculation on IOI Properties Bhd's privatisation, which would generate trading interest. 

For the financial year (FY) ended June 30 last year, IOI Corp recorded pre-tax profit in excess of RM1bil, compared with RM812.6mil a year earlier.  

However, a Singapore-based research house expects the group's average CPO price to trend downwards over the next three years.  

“We expect IOI's average CPO price to be RM1,560 this year, down from RM1,575 last year, and further fall to RM1,450 in FY06 and RM1,400 in FY07,” it said. 

IOI Corp closed at RM9.50 on the last day of trading in 2004, up 24% from the RM7.65 on the first trading day of the year. 

As for GHope, its rationalisation exercise with Island & Peninsular, completed in November last year, transformed it into a larger plantation group, its land bank increasing by 45% to 172,312ha.  

An analyst with a foreign-based research house said: “We expect GHope to reap an exceptional gain of RM200mil to RM250mil from the rationalisation exercise, which would be recognised in FY2005.”  

GHope's pre-tax profit for FY04 rose to RM471.9mil on the back of a strong turnover of RM2.80bil. 

However, the M&A activities to further consolidate PNB's plantation entities cooled down after Guthrie's rationalisation exercise was voted down by its shareholders.  

In the event CPO prices rise, analysts expect investors to shift to pure plantation stocks like KL Kepong and PPB Oil Palms. 

Mayban Securities, in its recent notes, said KL Kepong had one of the strongest balance sheets among plantation companies. 

One analyst said: “The group's strong cash position can be used to expand downstream operations. Perhaps investors would prefer to see better capital management from the company via a higher dividend policy.”  

PPB Oil Palms is a top pick among analysts as this pure plantation small-cap stock has superior growth prospects with an attractive plantation profile, which includes 53% of its estates located in high-yielding Sabah. 

Going forward, an analyst said the anticipated further weakening in CPO prices next year would justify the aggressive moves downstream by companies like IOI and Golden Hope to offset the volatility in CPO prices.  

Meanwhile, global CPO demand is expected to be strong enough to limit any impact from rising edible oil supply to the market softening, instead of turning bearish.  

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