25th Jan 2013
PETALING JAYA: Having been battered down since last September, is it a good time for investors to buy into plantation stocks?
Over the last 12 months, the plantation index of Bursa Malaysia has underperformed the benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) significantly. To-date, the plantation index is some 15% below the FBM KLCI.
This is not surprising, considering that the third-month contract of crude palm oil (CPO) prices have been taking a beating since September, dipping 19.26% to around RM2,481 per tonne on Jan 23.
The CPO price decline is basically due to higher inventories and weaker demand.
Interestingly, though, analysts are not screaming “buy” just yet. Most research houses are “neutral” or “underweight” on the sector, as they expect disappointing fourth-quarter results for plantation companies, which should start streaming out in February.
Despite the bearish overall outlook for the sector, some analysts reckon that a few plantation stocks are worth looking at, on the basis that their fundamentals do not justify their selldown.
But first the bearish views. A broker told StarBiz that he would avoid plantation stocks for now, simply because there were other sectors that provided more attractive yields.
“Sectors like oil and gas and construction can offer better capital returns for investors,” he said.
Kenanga Research analyst Alan Lim Seong Chun said: “It (2013) is not a good year for plantation stocks.”
He rated the sector as “underweight” based on three considerations: a limited CPO price upside, disappointing forecast fourth-quarter earnings and the lower usage of palm oil in the Northern hemisphere.
He said plantation stocks tend to move in tandem with CPO prices and he did not see a significant price increase in 2013.
Besides that, he expected the fourth-quarter earnings to be a “major disappointment”, as CPO prices have tumbled since last October.
He also said CPO prices would trade at a discount to soybean oil prices in the short term.
“Due to palm oil's structure, which solidifies during winter in the Northern hemisphere, I expect usage in that region to remain low until the season ends in March. Demand will only come in after that,” he opined.
But OSK Research analyst Gan Jian Bo was more sanguine about the sector: “The fourth-quarter financial results might drag companies' share price performance but we expect 2013 to be a much better year for plantation companies, especially those with good production growth.”
Gan pointed out that one positive factor for the industry was the zero-tax structure introduced by the Malaysian Government, and expects some tax gains in the coming months following better CPO prices. The zero export duty was aimed at increasing the competitiveness of local exporters when the CPO spot prices were trading below the RM2,250-per tonne level.
As for the more stringent requirements imposed by the Chinese regulator, Gan expects Indonesian planters to hurt more than Malaysian planters, as Malaysia's CPO quality was generally better due to the more advance infrastructure here.
Gan opined that investors should look at plantation stocks with low valuations and good production outlook.
His top pick? Sarawak Oil Palms Bhd due to its young tree profile and strong production growth prospects. Sarawak Oil also trades at a forward price earnings multiple of 11 times, compared with the sectoral average of 15 to 16 times, Gan noted.
“Besides that, Sarawak Oil has also displayed good corporate governance and expertise, particularly, planting in peat soil,” he said.
Gan also has a “buy” call on Sime Darby Bhd, given its low valuations of 13 to 14 times earnings and its diversified earnings base.
CIMB Research analyst Ivy Ng, meanwhile, has a “neutral” call on the sector.
Her top pick is Sime Darby Bhd due to the conglomerate's attractive valuation among other big caps, notwithstanding her “neutral” call on the stock.
Kenanga Research's top pick is PPB Group Bhd, the only “outperform” call in the sector within the research firm's coverage.
The research house's Lim said the company was less affected by low CPO prices due to its bigger downstream operations, best third-quarter results for planters under its coverage, and limited downside risk.
PPB Group's share price was 20.52% lower compared to slightly more than six months ago when CPO third-month futures were trading at the RM3,000 to RM3,100-per tonne range to close at RM12.24 on Wednesday. Sarawak Oil was down by an 18.26% discount over the same period while Sime Darby was 5.61% lower at RM9.24.
[Source]
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