“Potential de-rating catalysts for the Malaysian planters are falling CPO price in 3Q, lower crude oil price and improved weather prospects in major planting areas. Our only pick in the Malaysian plantation sector is Sime Darby as the stock stands to benefit from the move towards the new FBM 30 index, has the lowest P/E (price-earnings) multiple and foreign shareholding among the three largest big-cap planters in Malaysia and may engage in earnings-enhancing M&As. We maintain our preference for the Singapore-listed planters,” it said.

Meanwhile, OSK Research downgraded the plantation sector to underweight from neutral as it believed a sharp reversal in palm oil price was imminent.

“Nevertheless, average palm oil price YTD (year-to-date) has exceeded our expectation; as such we are raising our average price assumption to a more realistic RM1,900 per tonne.

“The ‘reluctance’ of plantation stocks to rise in tandem with palm oil price may signal a top in palm oil price in the very near future. We doubt a rally in crude oil price will help to lift palm oil price as the latter commodity is already trading at an equivalent of US$110 (RM387.20) per barrel. A correction in palm oil price may trigger a switch in our stock valuation to trough PEs,” it said.

OSK Research added that as demand has been rather lacklustre especially at higher prices, it has become evident that the current rally was very much a supply-driven one.

According to Maybank Investment Bank (Maybank IB), inventory levels may have bottomed.

“Malaysia’s April 2009 inventory was within market expectations, and may have bottomed for 2009. Though CPO price is likely to stay firm in 2Q09 given the present tight inventory level, it is likely to experience a steep correction in 2H with rising production. Valuations of plantation stocks remain expensive even as we consider upgrading our CPO price assumption to RM2,000 per tonne (from RM1,600),” it noted.

It added that one month futures CPO discount to soy oil has also narrowed further to below US$50/tonne from US$135 (March 2009) and US$315 (Oct 2008). “With rising production in 2H and a likely switch of consumer preference back to soy oil or rapeseed oil due to the narrowing discount, demand for palm oil is expected to slow,” Maybank IB noted.

It added that even at RM2,000 per tonne, IOI and KLK remained expensive at 20 times and 15.5 times price-earnings ratio (PER).

“Maintain underweight on the sector as a price correction is imminent. Risks to our view are a weaker US dollar, higher energy prices, and further supply disruptions due to weather anomalies,” said Maybank IB.

This article appeared in The Edge Financial Daily, May 13, 2009.