Plantation stocks risk further cuts

  • Business
  • Wednesday, 12 Mar 2008

PETALING JAYA: Some analysts have adjusted their ratings on plantation stocks to reflect higher market risk, and warned of further cuts if windfall tax on crude palm oil (CPO) were to be re-introduced. 

“Talk has re-emerged that the government would need to raise its revenue equation to sustain high subsidies for oil and other food products,” Aseambankers said in a report yesterday.  

Analysts said sentiment on the plantation sector could be hurt if companies had to pay any additional taxes imposed by the new policy-makers.  

In the late 1990s, the government imposed a RM50 per tonne windfall tax on CPO price of above RM2,000 per tonne.  

Meanwhile, CIMB Research cut its target price on Sime Darby Bhd by 26% to RM11.70 from RM16 yesterday after adjusting for a lower price earnings (PE) target of 18 times, compared with 22 times previously for its plantation unit.  

This also includes a 10% discount to valuation to reflect any potential hiccups on government-linked companies' reforms and possible delays in its potential venture in the Bakun power generation and transmission project.  

However, the research outfit has retained its outperform call on Sime, given its bullish view on CPO prices and the group's plans to improve the operating efficiency of its plantation division. 

CIMB also lowered its target price on Kuala Lumpur Kepong Bhd (KLK) to reflect a lower target PE in line with the outfit's overall market downgrade.  

While it is revising its calls on certain stocks, Aseambankers has, however, kept their target prices unchanged.  

Some large cap stocks “no longer appear expensive” after the recent correction in their share price following Monday's heavy sell-down, it said in upgrading IOI Corp Bhd to fully valued from sell, KLK to hold from fully valued, Sime to hold from fully valued and Asiatic Development Bhd to buy from hold. 

Aseambankers believes that CPO price would likely peak this year and trade at a more sustainable level next year.  

It is maintaining its average CPO price assumptions of RM2,800 per tonne for 2008 and RM2,500 per tonne for 2009. It is also not ruling out the possibility of another round of speculative buying.  

Meanwhile, Aseambankers is also revising downwards all mid- and small cap stocks due to drying liquidity in the overall market and lowering its valuation multiples for mid-cap stocks to 10 to 11 times price-earnings ratio (PER) from 13-13.5 times. 

OSK Research, however, remains overweight on the plantation sector.  

“We are in the midst of revising upward our average CPO price assumption from the current RM2,750 per tonne for this year,” plantation analyst Alvin Tai said. 

However, target prices for plantation stocks under its coverage would not change much as PER for equity markets were being compressed, he added.  

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