POOR weather conditions in major oilseed producing countries spells good news for the crude palm oil (CPO) price outlook with commodity analysts projecting an average of between RM1,400 and RM1,500 per tonne this year, and RM1,600 per tonne next year.
Of late, stock broking houses have turned bullish on the plantation sector, giving it an “overweight” recommendation compared with their neutral stance previously.
Analysts concur that the CPO price prospect looks good, following reports that the drier-than-expected weather in major planting countries like Malaysia, the US and India will crimp supply as the three countries produce about 30% of the world's edible oils.
The demand front also looks good with the rising bio-diesel demand from the European Union and anticipation of increasing consumption by China.
Analysts said CPO prices would be driven by weather-induced supply concerns, which would tighten global edible oil stocks, particularly next year, and prices would have to adjust upwards to ration demand.
Within the sector, major listed plantation groups like IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KLK), PPB Oil Palms Bhd (PPBOP) and Golden Hope Plantations Bhd (GHope) are potential beneficiaries of the CPO price upswing.
Most analysts concur that IOI Corp remains the favourite large cap stock in plantation. IOI Corp's share price, for example, has stunned the market as the stock closed at its all time high of RM11.00 last Friday.
“The return of investor interest in the stock has come about mainly from the revived interest in plantations,” an analyst with MIDF Sisma Securities said.
“We have adjusted our CPO price expectations for IOI Corp in FY06 to RM1,525 per tonne, which is an earnings per share (EPS) upwards of 5.4% from our earlier forecast.”
For the coming years, IOI Corp will enjoy a larger oil palm hectarage, with the inclusion of Pamol estates and its Sabah-based plantations.
OSK Research, in its recent notes, said: “Since our upgrade on plantation stocks in May, IOI Corp has risen by about 13.1%.”
The research unit is recommending a buy on IOI Corp, which it believes is not fully valued and its price earnings ratio (PER) could expand to 15.8 times based on the historical trend. That will place IOI at RM12.20 per share.
PPB Oil Palms (PPOP), meanwhile, has been the star performer among plantation stocks of late. It has chalked up a 23.2% gain (including a 10 sen dividend) since OSK Research, among others, upgraded the plantation sector.
The research unit said: “At the price of RM4.14, PPBOP has reached our 12-month price target of RM4.12.”
PPBOP managing director Khoo Eng Min, in a reply to StarBiz, said the CPO price had been quite resilient, to date.
“We expect CPO prices to remain at or close to the current level for the remainder of the year, barring any major adverse weather phenomenon,” he added.
Khoo said PPBOP expected any increase in palm oil production to be absorbed by demand in the US and Europe, in addition to demand from traditional markets in East and South Asian countries.
The recent reduction in the palm oil stock level is a result of increased demand from these countries, and reduced CPO production, especially in June.
According to Khoo, supporting factors which will drive PPBOP's earnings this year will be the expected increase in CPO production from its estates in Sabah and Sarawak, and Indonesia.
“We expect CPO production to increase 10% over that of 2004 and average oil extraction rate to be about 21.8%.”
Although there is increasing pressure from higher fertiliser and fuel costs, he said the cost control and productivity measures that PPBOP had in place would provide reasonable and comfortable margins for PPBOP this year, compared with last year.
He said PPBOP was positioning to be the most efficient producer of sustainable and quality palm oil, and at the same time, mindful of environmental, social and food safety issues.
A Singapore-based brokerage favours IOI Corp and KLK as its picks of the crop in plantations. It said IOI Corp had better share liquidity and a more aggressive management team, which had done a better job at enhancing shareholders' value.
Weighing in on KLK are its cheaper valuations and higher earnings sensitivity to CPO prices, which is a big plus in an environment of rising prices.
The brokerage said about 70% of KLK's pre-tax profit came from its plantation division and the company was an efficient planter with a below-industry CPO production cost of about RM746 per tonne in the financial year ended Sept 30, 2004.
“At current price levels, we prefer KLK for its higher absolute returns and dividend yield,” the brokerage added.
On GHope, the brokerage said its earnings upgrade was the steepest. This group's EPS for the financial year ending June 30, 2006, is expected to be 30% higher from its earlier estimate. “Our new target price is RM4.14 and we raise the rating from a sell to hold, and will review the call after the resolution of the distribution of Island and Peninsular Bhd's shares to GHope shareholders, which is being held up at an on-going court case.“
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