19-12-2008: Plantation stocks stage mini-rally

The Edge Daily (KUALA LUMPUR): After a lapse of several months, plantation stocks were back among the top gainers on Bursa Malaysia yesterday.

The plantation index rose 209.17 points to close at 4,172.64 despite the overall bearish outlook for crude palm oil (CPO).

IOI Corp Bhd, Kuala Lumpur Kepong Bhd and United Plantations Bhd were among the top 10 gainers yesterday, rising 32 sen, 35 sen and 30 sen to RM3.62, RM9 and RM10.40, respectively. Sime Darby Bhd, the world’s largest listed plantation company, was among the most active stocks, adding 15 sen to RM5.65.

Sime Darby president and group chief executive Datuk Seri Ahmad Zubir Murshid attributed the rise in stock prices to the anticipated decline in production and stock levels.

“It is all about stock levels and the demand for the festive season. This is the time production level is anticipated to come down,” he said yesterday.

CPO stock levels for November increased to 2.27 million tonnes from 2.1 million tonnes in October. But going forward, stock levels are expected to fall.

The head of a local research house said that the strong performance of plantation counters could be due to year-end window-dressing.

“The performance of these stocks came as quite a surprise. I wouldn’t jump on the bandwagon; their comeback wasn’t a result of any major shift in fundamentals,” he said.

A report by Reuters said the firmer prices for plantation stocks were due to expectations a weaker US dollar would boost sales of CPO and bolster earnings.

Meanwhile, CPO for March 2009 delivery fell RM35 to RM1,545 a tonne on Bursa Malaysia Derivatives, as oil prices fell to 4½-year lows yesterday. The decline in oil prices came despite the Organisation of Petroleum Exporting Countries announcing it would make its largest-ever production cut, by 2.2 million barrels a day, next month.

Light, sweet crude oil for January delivery slipped to a low of US$39.19 (RM137.16) a barrel in electronic trading on the New York Mercantile Exchange yesterday, the lowest since July 2004. As at 5.30pm, it had settled at US$40.50 per barrel.

RHB Research said crude oil prices were expected to remain a volatile trigger for CPO prices, with demand uncertainties persisting into next year.

“We maintain our CPO price assumptions of RM2,800 per tonne for CY2008, RM1,600 for CY2009 and RM1,500 for CY2010. Post-2009 and into 2010, we expect CPO prices to remain weak due to the more fundamental reason of a rise in CPO supply coming from Indonesia, when plantation land starts coming into maturity once more,” it said.

Other analysts also remained largely neutral on plantation stocks, mainly due to high CPO inventories and the continued downtrend in crude oil prices.

OSK Research, in a note, said although production was 0.5% higher year-on-year to 1.66 million tonnes in November, the decline in net exports due to record palm oil imports caused inventory to hit its new record high.

“We are maintaining our neutral call on the sector given that palm oil prices are likely to remain sideways until inventory levels start getting pared down, at which point we think palm oil prices will be ready for a new upcycle. Until we get there, our preference is for companies with strong downstream operations as their earnings are more defensive in a weak CPO price environment,” the research house said.

It cited IOI Corp and Kulim (M) Bhd as two of the strongest downstream players, recommending a trading buy on both stocks.

A palm oil trader opined that a year-end rally in CPO was unlikely given the slowdown in the global economy.

“With prices at the RM1,500 level, palm plantation players are still making money. But for prices to pick up and rally by year-end is unlikely,” he said.

He said that a recovery in CPO prices to the RM2,000 level was possible in the first half of 2009.

“There are a few elements which determine the movement of CPO prices. Palm oil’s discount to soyabean oil has narrowed, so there would be some impact. What could also affect CPO prices is the demand-supply factor, but that has not been drastically affected so far,” the trader said.

He also said there would be no immediate impact from the move by six plantation companies to reduce the use of fertilisers.

“The impact from the firms’ decision to cut down or stop using fertilisers to control production would only be seen six months later,” he said.

From the demand perspective, palm oil remained attractive and exports had gone up.

According to independent cargo surveyor Intertek Testing Services, palm oil products for the period Dec 1 to 10 surged 93% to 619,180 tonnes from 320,081 tonnes shipped between Nov 1 and 10.

Exports to the Indian subcontinent jumped to 139,611 tonnes from 40,450 tonnes while exports to China climbed to 155,820 tonnes from 91,179 tonnes.

Another cargo surveyor, Societe Generale de Surveillance, estimated a 94% jump in the country’s CPO exports in the first 10 days of December compared with the same period in November. About 611, 225 tonnes of Malaysian bulk palm oil shipments were tracked during the period.