Friday 29 Mar 2024
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 insiderasia

THE outlook for Genting Plantations (formerly known as Asiatic Development) has improved in line with the recovery in crude palm oil(CPO) prices from the lows in October 2008. Indeed, its share price has fared very well, rebounding from a low of RM2.60 to the current RM5.45 over the same period.

Solid longer-term prospects
We are comfortable of the company’s longer-term prospects. Its plantation business is expected to grow steadily for the foreseeable future.
Genting Plantations’ oil palm plantation is relatively young. About half of its planted landbank is in the prime ages of between seven and 15 years with just under one-third under seven years of age. The latter will gradually enter their prime harvesting periods over the next few years.

genting-plantation_090623The company has a strong balance sheet. It is sitting on net cash totalling RM471.6 million at end-March 2009. The positive cash position will support Genting Plantations’ planting-up programme, which will, in turn, underpin growth over the longer term.
 
The company aims to plant up some 50,000ha of landbank under various joint ventures, mostly in Indonesia, between 2009 and 2011. For the current year, Genting Plantations is targeting to plant some 10,000-15,000 hectares. It is also pursuing approvals for the acquisition of roughly another 62,000ha of land in Kalimantan.

Shares fairly valued assuming CPO price of RM2,100 per tonne
The stock is currently trading at roughly 19.6 times our estimated 2009 earnings after the recent rally. We have assumed an average CPO selling price of RM2,100 per tonne in our forecast.

Should CPO prices sustain above this level, there may be room for further upside for the stock. For the moment though, its share price does appear fairly valued.

The company reported net profit totalling RM36.9 million in the first quarter of 2009 (1Q09) on the back of average CPO selling price of about RM1,862 per tonne. Earnings are expected to improve in 2Q09 given that CPO prices are currently averaging at around RM2,500 per tonne in 2Q to date.  

Upside potential if CPO prices sustain above this level
Looking further ahead, the market is somewhat more divided on the outlook for CPO in the second half of 2009 (2H09).
Some industry observers predicted that prices could break above RM3,000 per tonne if the country’s dry spell persists in the coming months, adding to tree stress. Lower usage of fertiliser in the past few months, because of the sharp drop in CPO prices, may also affect yields.

gp_earningsOn the other hand, CPO production may pick up traction in 2H09. Output in the first few months of this year was lower year-on-year on the back of bad weather conditions, especially in East Malaysia. But the second half of the year is traditionally the peak harvest season for palm oil. There are also some nascent indications that demand momentum may be slowing.

Rising supply and slowing demand could result in stockpiles starting to rise again. If so, that would limit future price gains. Indeed, CPO prices have pared gains of late. The three-month benchmark futures contract on Bursa Derivatives is currently hovering around RM2,200-RM2,300 per tonne, well off its recent peak of nearly RM2,800 per tonne.

Increasing volatility in commodity prices
Forecasting commodity prices is becoming increasingly difficult, compounded by the unpredictable weather conditions, a likely effect of global warming, around the world. For instance, drought in major crop-producing regions in South America resulted in the tight supply of soybean — a key factor behind the rise in prices for edible oils in recent months.

Commodity prices are also increasingly being driven by currency exchange rates, especially the US dollar. Should the greenback weaken, as it is widely expected to, commodity prices could see more upside. Furthermore, the increasing use of food crop such as corn and soybean oil in the production of biodiesel links edible oil prices to the more volatile crude oil market.

On balance, it appears that even if CPO prices do pull back in 2H09, they are unlikely to see the lows registered in 4Q08. Given prevailing conditions, we are relatively comfortable that our price assumption for Genting Plantations is achievable. Net profit for the full year is estimated at RM214 million or 28.3 sen per share. Net tangible assets will rise to RM3.22 per share.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

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