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Saturday, March 8, 2014

Research firms retain overweight stance on plantation sector


PETALING JAYA: Most research firms have retained their overweight stance on the plantation sector following bullish remarks by palm oil experts who believes that there are still upside potential for crude palm oil (CPO) prices, with projections of prices reaching RM3,000 a tonne by mid 2014.
In the recent Palm and Lauric Oils Conference 2014, many speakers highlighted that biodiesel demand and weather issues as the main drivers of CPO prices' current rally.
RHB Research said its CPO price assumption of RM2,700 a tonne for 2014 and RM2,900 a tonne for 2015 has not factored in impact of El Nino.
"We believe this is still the early stage of a bull market as funds have started to flow into the palm oil sector and valuation remain inexpensive," it said in a note yesterday, adding that its top picks include First Resources, Astra Agro Lestari, IOI Corp Bhd, Golden Agri and Jaya Tiasa.
Public Investment Bank is keeping its outperform overweight call on the plantation sector with an unchanged CPO price forecast of RM2,750 a tonne for 2014 and 2015 respectively.
The bank liked Genting Plantations Bhd, Ta Ann Holdings Bhd and TSH Resources Bhd for their pure plantation upstream focus, double-digit growth in fresh fruit bunch (FFB) production, young age profile of plantation and cheaper valuations.
It said CPO prices has been on bullish move since Oct 2013 driven by the introduction of higher biodiesel mandate in Indonesia, which will spur its domestic demand significantly.
"Assuming the dry weather continues to persist for the next couple of weeks, we anticipate that CPO prices will clear the RM3,000 a tonne hurdle soon. However, at this level, the biodiesel mandate story shall diminish as high feedstock costs might deter government's intention in promoting local consumption for palm oil," it said.
In addition to that, it said plantation companies in the affected area will experience declining production from as low as 5% year-on-year to 20% year-on-year for a period of 10-12 months subject to the severity levels.
The bank suggest investors look into plantation companies with strong production growth this year, pure upstream focus and estates located in less affected area, which will see a good buying opportunity as they will likely exhibit a strong set of results this year.
Hong Leong Investment Bank, which is neutral on the plantation sector, is keeping its average CPO price projection of RM2,700 a tonne in 2014-2015 for now, pending for a more convincing evidence that supports the potential El Nino event, despite the generally bullish undertone by speakers at the conference.
"Nevertheless, we believe the current bullish undertone will result in CPO prices overshooting on the upside in the near team, which in turn provides trading opportunities for CPO stocks. As such, we believe focus should be on plantation stocks with higher liquidity," it said.
Maybank Kim Eng expect CPO prices to range between RM2,600 a tonne to RM2,800 a tonne in the short term although it believe the market is also pricing in some weather risk for now due to the lack of rainfall in Malaysia and parts of Sumatra.
"Nevertheless, we caution that CPO prices will likely weaken to between RM2,400 a tonne to RM2,600 a tonne towards the May-June 2014 period as South American harvests hit the market, relatively higher US soybean planting starts and as the market prices in stronger CPO output in 2H14. Much is premised on rainfall returning soon," it said.

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