Some of these players included Tradewinds Plantations Bhd, Kim Loong Resources Bhd, IJM Plantations Bhd, Kulim (M) Bhd, Kwantas Corp Bhd and Hap Seng Plantations Holdings Bhd. 

The question is, are these stocks underperforming because of fundamental flaws, such as poor yields, weak balance sheet or simply because they are not on investors’ radar screens?

More often than not, it is the latter, says a plantation analyst with a foreign research house. He explains that there is a fundamental disconnect between the share price performance of small to mid-cap plantation stocks and CPO prices.

“A lot of smaller plantation companies are pure upstream stocks; they tend to be more leveraged and benefit directly from a CPO rally. However, it seems that gains in CPO are boosting bigger players like Kuala Lumpur Kepong and Wilmar International Ltd. So the issue with smaller players is really about investability,” he adds.

CPO futures have been on an upswing since October when prices tumbled to the RM1,300 level. It rose 88% to close last Friday at RM2,625 per tonne on Bursa Malaysia Derivatives Exchange. In line with the commodity’s trend, Wilmar’s shares saw very strong performance, rising a whopping 101% to S$3.92 last week when CPO rallied. It is also worth noting that Wilmar’s plantation business contributes only 18% to its profit before tax.

The Malaysian plantation company that really underperformed, the analyst says, is Tradewinds. In its financial performance for the year ended Dec 31, 2008, the company was in the red in the 4Q with a RM12 million loss before tax due to higher operating expenses and share of losses in a jointly controlled entity.

“Tradewinds is not favoured by investors because it has a very high cost of production as about 70% to 80% of its plantation land in Sarawak is peat soil. At its current share price, I’d say there would be more downside in price,” Inter-Pacific Research analyst Koay Yi Chuan says. Tradewinds owns about 140,000ha of plantation land in Malaysia and Indonesia.

With a high percentage of land comprising peat soil, there is also concern over whether Tradewinds qualifies for the Roundtable on Sustainable Palm Oil (RSPO) certification.

Peat soil is a key issue in the quest for sustainable palm oil as non-governmental organisations and scientists pick on the soil’s high carbon emission, as draining one metre of peat soil in the planting of oil palms emits about 90 tonnes of carbon dioxide.

According to industry experts, planters opt for peat soil as a last resort as it costs more than 40% to develop. It also involves higher maintenance costs than mineral soil. Analysts estimate Tradewinds’ CPO production costs to be in the range of RM1,800 per tonne.

Its chief executive Chan Seng Fatt, however, said its cost of production was about RM1,300 a tonne, with the bulk spent on fertilisers.

To measure the performance of small to mid-cap planters, the analyst with a foreign brokerage said IJM Plantations is seen as a benchmark.

“IJM Plantations is a pure upstream play and it has just started to develop. In terms of tree profiles, a lot of them are still young. So if it could post a net profit of RM34 million for its 4Q, when times were really bad, there is no reason why the other smaller players, which are more established with mature hectarage, should perform poorly.”

Kim Loong Resources Bhd and Kulim (M) Bhd also underperformed, but there is room for improvement, say analysts.
In April, OSK Research Sdn Bhd raised its recommendation on Kulim to a “trading buy” from “neutral” on stronger earnings this year. Kulim’s Johor operations received the RSPO certification earlier this year after its subsidiary New Britain Palm Oil Ltd was recognised for sustainable CPO production since September 2008.

“Being a RSPO-certified producer, Kulim can price its product US$40 to US$50 (RM141 to RM175) per tonne higher over ordinary palm oil in Europe,” OSK Research senior plantation analyst Alvin Tai noted in his report.

Kulim also has the benefit of a resilient earnings base as it is more diversified with holdings in QSR Brands Bhd.

Kim Loong, another plantation player, gets minimal coverage by analysts. The company has a total plantation landbank of 12,235ha, of which 11,193ha are planted with mature palms.

“Kim Loong’s tree profiles are young and have a low base. There is potential for this firm to see its margins expand and it has the potential to post incremental earnings,” says a plantation analyst with a foreign broker.

While market participants are cautious about the rally in CPO prices, Plantation Industries and Commodities Minister Tan Sri Bernard Dompok said recently that low palm stocks of 1.2 million tonnes would keep CPO prices steady this year at between RM2,600 and RM2,800 per tonne. He added that prices of the commodity would rise steadily without the spectacular swings seen last year.

A plantation player also expects prices to remain firm at the current level up to July.

“Plantation players are feeling quite bullish on prices. Prices may be softer in 2H when production picks up. Even then, prices are likely to stay above RM2,000,” says Yong Chin Fatt, Palm Oil Refiners Association acting chairman.

This article appeared in the Corporate page, The Edge Malaysia, Issue 754, May 11-17, 2009.